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Although the federal government seems to have turned a blind eye
to the legalization of the medical and even recreational use of
cannabis in certain states, they have not relinquished their duty
to maintain competitive markets in the U.S. Over the past year, the
Federal Trade Commission ("FTC") and the Department of
Justice ("DOJ") have used their powers under the
Hart-Scott-Rodino ("HSR") Antitrust Improvements Act of
1976 (the "HSR Act") to investigate mergers and
acquisitions in the cannabis market, even though the operations of
such business are essentially illegal under federal law.
The HSR Act was established to provide a way for the federal
government to review pending merger and acquisition transactions in
the U.S. to prevent anticompetitive deals from being closed. In its
simplest terms, parties to a transaction that meet or exceed
certain asset or sales values, or are engaged in a transaction that
meets or exceeds certain value thresholds, must put the FTC and the
DOJ on notice of the transaction. After an HSR filing has been
completed by both parties, there is a specified "waiting
period" (depending on the type of transaction) for the
agencies to review the filings. If the waiting period expires or is
terminated early, then the parties can proceed to close the deal.
If one or both of the federal agencies make certain requests,
however, the deal is placed on hold until the requests are
satisfied. The issuance of what is known as a "second
request" typically requires the parties to the transaction to
provide numerous documents and information, which can be both
time-consuming and expensive. The federal agencies could also
choose to reject the transaction entirely.
In 2019, the DOJ issued at least seven second requests on
pending mergers of companies engaged in the cannabis market. These
requests were not issued in connection to the fact that cannabis is
an illegal substance under federal law, but rather to ensure the
transactions don't raise any antitrust concerns. Letters from
the DOJ did mention, however, that they might share the
submitted information with other parts of the department –
and the Drug Enforcement Administration just so happens to fall
under the DOJ umbrella. A few key players in the industry have
argued that requests from federal agencies in connection to
anti-competition concerns are unfounded since the cannabis market
is largely regional and is not generally active in interstate
commerce. Second requests have also led to strains on cannabis
stocks, decreases in the transaction value during the compliance
process, and arguably contributed to the death of cannabis deals
altogether.
Fortunately, it appears that over the past few weeks, the DOJ
has released some of the pressure it placed on cannabis
transactions, as companies in the industry have reported that
either the initial HSR waiting period expired without subsequent
requests, or that the transaction was found to be in compliance
with the HSR Act. Of course, only time will tell whether cannabis
transactions will continue to be permitted, and whether such
progress will positively impact the cannabis market.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Managing Investigations And Litigation Risk In The Food & Beverage Sector
