Law Times

LAW TIMES COVERING ONTARIO'S LEGAL SCENE | MARCH 18, 2019 11 www.lawtimesnews.com BY DALE SMITH For Law Times W ith the rollout of private retail cannabis stores in Ontario, the province put restrictions in place to en- sure that licensed producers can only maintain a 9.9-per-cent stake in those retail outlets. Franchise lawyers say deals between producers and retailers need to be structured in such a way as to comply with both the provincial restrictions on fran- chises and ensure that the re- tailers maintain ownership and control. The Ontario government de- cided to do the initial rollout of non-transferrable retail licences by way of a lottery for the first 25 stores, to be administered by the Alcohol and Gaming Commis- sion of Ontario. "Most of the lottery winners are trying to find ways to enter into agreements to still open up their operations," says Eric Fos- ter, a partner at Dentons Canada LLP in Toronto. "It's been a challenge. We've already seen an instance of one lottery winner who has been disqualified." Those stores must be oper- ated by themselves and can't be a franchise. Foster says that, because of the way in which the retail lot- tery was structured, there were nearly 18,000 entrants, the vast majority of whom were not sea- soned retailers who had experi- ence or any industry-specific expertise related to cannabis. Of the 25 chosen, he says, many did not have the sophisti- cation to get a retail operation up and running in a short time in a very regulated industry. "They needed to reach out to people who do have that experi- ence, which was essentially con- sulting services," says Foster. Mark Asfar, a lawyer with Momentum Business Law PC in Ottawa, says the province's goal was to support small business and oppose vertical integration of the cannabis market, where the producers would also be the retailers. Asfar says this is why the total ownership and control percent- age by licensed producers in re- tail interests is capped at 9.9 per cent. "You have these highly capi- talized businesses that have been in this industry since the medi- cal days," says Asfar. "If they wanted to, they could blanket the province in stores and not break a sweat." Asfar says this is why the own- ership rules were put in place, but it also means that those compa- nies with vast sums of capital and professionals and experts in the field with resources to share are effectively locked up. "It means they've re-evaluated their business models and how they want to make money," says Asfar. "They've said our profits still come from selling product, but we'll make our expertise and we'll make our resources avail- able to these retailers to support them in the hope that they will make a friendly and accessible market that will buy a lot of our product." Asfar says this is why many of the producers are offering free advice to prospective retailers — to establish friendly relation- ships that will mean the retailers sell their products. Chad Finkelstein, a partner at Dale & Lessmann LLP in Toron- to, says lawyers need to be aware of the prohibitions in Ontario's Cannabis Licence Act, as they are very densely drafted, partic- ularly when it comes to restric- tions for licensed producers and their affiliates when it comes to control of stores. "In order to structure an agreement and a relationship that complies with the Ontario Cannabis Licence Act, you need to understand what the distinc- tion is between control, in fact, and franchising," says Finkel- stein. While franchising is a statu- torily defined term that details control over a method of opera- tion, Finkelstein says this is dis- tinct from control in fact. "Being aware of that distinc- tion, and taking a conventional franchise agreement and mak- ing sure that it doesn't inadver- tently cross any lines into con- trol in fact — that has been for a few months a really interesting challenge for those of us who regularly practise in the area," says Finkelstein. "If you're a cannabis brand owner and you want to do business with these [retailers], and since their licence is non- transferrable, you basically have to have some kind of licensing relationship because you are granting rights to a third party to use your brand," says Finkel- stein. Finkelstein says that be- cause the deals are under tight deadlines and intense regula- tory scrutiny, it's important for lawyers to be aware of what ele- ments in the normal franchis- ing or licensing relationship they need to strip out to ensure that there is no change of con- trol and to be aware of what the disclosure obligations are to the licence operator. Asfar says that instead of share ownerships or traditional franchise agreements, which are not permissible, lawyers draft- ing these agreements have to be creative. "It's a very exciting period in- sofar as creative drafting," says Asfar. Mark Asfar says the province's goal was to support small business and oppose verti- cal integration of the cannabis market, where the producers would also be the retailers. Lottery system for 25 stores Retailers and producers work out structure of storefronts FOCUS See Provincial, page 12 Keep up with key cannabis-related legislation from across Canada Available risk-free for 30 days Online: store.thomsonreuters.ca Call Toll-Free: 1-800-387-5164 In Toronto: 416-609-3800 Order # L7798-8917-65201 $145 Softcover approx. 890 pages February 2019 978-0-7798-8917-4 Annual volumes supplied on standing order subscription Shipping and handling are extra. Price(s) subject to change without notice and subject to applicable taxes. 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