A trusted and diligent arbiter will best represent the distressed estate.

By Dotan Y. Melech and Scot Rutledge

When one or more stakeholders decides that their cannabis company and investment has reached a point where a receivership is the only alternative to address the problems plaguing their distressed business, all of the involved parties will head to court. The court appoints a receiver at the request of the stakeholders, and the receiver begins the laborious and expensive process of trying to understand what value might be recovered on the way to liquidation, or if turning around the fortunes of the distressed business through restructuring is possible. But how do stakeholders or creditors choose the right receiver for their particular case and what is the starting point?

Identify the Problem

If you are considering a receivership, the first step is to identify the problem or problems with the business. Consulting with an advisor like a lawyer can help you evaluate the options by looking at the various factors affecting the company and asking the right questions. What got you here? How can it be resolved? What is the desired outcome? How can you protect yourself during the process? The answers to these types of questions will help you and your lawyer/advisor consider potential candidates to assume the receivership role. By presenting the scenario to other attorneys, colleagues and regulators, names of possible receivers with the best qualifications to perform the job will begin to emerge.

With those referrals in hand, interviews can begin. Cannabis is such a nascent industry that most prospective receivers will not have direct experience in the industry, but should not necessarily be a barrier to a successful receivership. You should attempt to identify a receiver who has some understanding of the cannabis market, or at least can access that expertise through their network, and does not have any conflicts of interest related to the business in question.

You should meet with the receiver in person or through a virtual meeting to ask questions, present potential scenarios, evaluate their approach, and confirm there are no preexisting relationships with any involved parties. Attempt to learn what approach the receiver would take under different sets of circumstances. Look into their previous work. 

Key Characteristics of Cannabis Receivers

There are several characteristics to look for when deciding on the right person to handle such a difficult and unique process. First, does the candidate have the skills that match what you are trying to accomplish? Second, do you have a rapport with them? Keep in mind that once they are put in place by the court, the receiver no longer works for you or any party that recommended them. They work for the court and operate under the control of the court. They cannot be influenced or swayed to take the receivership in a certain direction or be considered to “owe you one” because you suggested them to the court. So you’ll need to do your due diligence on the front end.

Additional considerations for any potential receiver should include:

  • Is this person curious, thorough and willing to take the time to study, research and look into every corner of the business and its dealings? 
  • Are they highly organized and an excellent communicator and articulator?
  • Do they have a team of experts they can call upon? Find out who the receiver works with and what consultants they can bring on board to assist during the process. 
  • Have they done a receivership before? If so, what was the relationship they had with regulators?
  • Are they viewed as someone who is needed, trusted, competent and a value-add to the regulated marketplace?

Documentation is critical. All records that exist surrounding the creation of the IP should be available to support the validity and value—and potential liquidity—of the property.

Enhancing IP Value During a Cannabis Receivership

It is important to remember that even if the candidate has previously handled a receivership, a cannabis receivership presents a unique situation. Receivers experienced in other industries frequently operate with a cookie-cutter approach that does not lend itself particularly well to cannabis. You want to be sure this person is capable of understanding what causes a distressed cannabis business. They should be able to identify problems and precisely articulate them to all of the involved parties, and figure out how to make industry specific suggestions to improve the business.

Potential Pitfalls

The process of cannabis receivership can be very emotional, and it is important to remember that the receiver is not your friend. They operate most effectively as the arbiter of what the truth is in the situation at hand, why the business is distressed, and what is best for the business. It is not about what is best for you or any other stakeholders. Do not try to influence the receiver. You do want to have a rapport, but it is in the best interest of the distressed business or estate for the receiver to resolve all issues with regulators and courts with full transparency and no influence by any party. 

Are you considering a receivership? Reach out to United CMC today for expert guidance and support with choosing the receiver who is best suited for your specific scenario.