Issues with investing in medicinal cannabis: business associates and the fit and proper person criteria

By Josh Hunt / 08 February 2019

This update forms part of a series on the medicinal cannabis industry in Australia and considers:

  • when an investor may be deemed a business associate of a medicinal cannabis licensee; and
  • if an investor is deemed a business associate, the fit and proper person criteria they will need to satisfy in order to be involved with the licensee. 

Click here  for a general overview of the Federal Government’s 2016 amendments to the NDA and the basic elements of the medicinal cannabis licensing regime in Australia.

Australia’s medicinal cannabis industry continues to flourish. Between November 2016 and 15 January 2019, the Office of Drug Control (ODC) has granted a total of 26 medicinal cannabis (cultivation and production) and 20 manufacturing licences.

As the industry’s demand for investment grows investors looking to capitalise on medicinal cannabis licences and/or invest in licensees should be wary that the Narcotic Drugs Act 1967 (Cth) (NDA) imposes demanding obligations on “business associates” of licensees - a wide-ranging qualification that potentially includes shareholders, directors and other entities or arrangements which might profit from corporate medicinal cannabis licensees. 

Investors who are deemed business associates of a medicinal cannabis licensee may need to satisfy the ODC that they are a “fit and proper person” to be associated with a licence. In this regard, the ODC has the discretion to consider investor's:

  • criminal history; 
  • financial background;
  • character and associates;  and
  • their reputation, business experience and integrity.

Failure to satisfy these criteria can result in the alteration or revocation of the relevant licence, which may be fatal to the business.

Who are “business associates” of a medicinal cannabis licensee?

To determine whether they are subject to the fit and proper person obligations of the NDA, an investor must first determine whether they are a business associate of the medicinal cannabis licensee for the purposes of the NDA. 

Section 4 of the NDA provides "two or more persons are business associates in relation to a business" if both of these people:

  • hold a "relevant financial interest", or are entitled to exercise a “relevant power” in the business; and
  • are able to exercise a “significant influence” over, or with respect to, the management or operation of the business because of that interest or power.

A "relevant financial interest" in relation to a business is defined under the NDA as “any share” in the capital of a business and/or “any entitlement to receive income derived from the business.” A “relevant power” in relation to a business, “means any power, whether exercisable by voting or otherwise and whether exercisable alone or in association with others to participate in any directorial, managerial or executive decision of the business; or to elect or appoint any person to any relevant position in relation to the business.”

Although there is presently no case law on these particular sections of the NDA, equivalent provisions under the Corporations Act 2001 (Cth) and other legislation have been interpreted broadly by courts to reflect the spirit of the law in regulating informal agreements, understandings and arrangements whereby parties obtain direct or indirect control over a company’s affairs.

Investors should thus adopt a conservative approach in determining whether their involvement with a medicinal cannabis licensee may result in being deemed a business associate of the licensee (within the meaning of the NDA).

Fit and proper person criteria

Should an investor be deemed a business associate of a medicinal cannabis licensee, sections 8A and 8B of the NDA prescribe the “fit and proper person” criteria they will need to satisfy to avoid disciplinary action from the ODC (including licence revocation). 

In determining whether a corporate entity is a fit and proper person for the purposes of being associated with a medicinal cannabis licensee, the ODC can have regard to (amongst other things):

  • the connections and associations that the body corporate,  its directors and officers, have with other persons (including but not limited to relatives of directors and officers);
  • the previous business experience of the directors and officers of the body corporate, and of the shareholders of the body corporate who are presently in a position to influence the management of the body corporate; 
  • whether the body corporate has a sound and stable financial background or is in financial circumstances that may significantly limit the capacity of the body corporate to comply with its obligations under a licence; and
  • whether the directors and officers of the body corporate are of good repute, having regard to matters going to their character, honesty and professional and personal integrity.

For natural persons, the ODC can similarly have regard to:

  • any criminal convictions or civil penalties;
  • financial background or financial circumstances;
  • reputation, honesty, and professional and personal integrity; and
  • the person’s history of compliance with the NDA.

The fit and proper person obligations imposed by the NDA are ongoing, and any development which might result in an investor no longer satisfying the criteria must be brought to the ODC’s attention. A prospective investor and any associated medicinal cannabis licensee should consider whether the investor’s reputation, associates and financial or criminal history could present a risk to the licensee’s licence and the ongoing operation of the enterprise. Specialist advice may be required before any association arises to avoid the risk that the involvement of a particular investor will result in the ODC limiting or revoking the relevant medicinal cannabis licence.

Final thoughts

The association provisions and the fit and proper person criteria of the NDA are broadly drafted and may potentially encompass a variety of business relationships between investors and medicinal cannabis licensees. 

Given the relative novelty of Australia’s medicinal cannabis licensing regime, it could be some time before the scope and depth of the ODC’s enquiries into investors (and in particular, shareholders) who qualify as business associates concerning a medicinal cannabis licensee’s business, become apparent.

To avoid potential complications and the risk of licence revocation, investors should obtain proper legal advice before planning any prospective involvement, investment or arrangement with a medicinal cannabis licensee.

For more information or discussion, please contact HopgoodGanim Lawyers’ Corporate Advisory and Governance team.

Josh Hunt
Josh is a Partner with specialisations across Digital Assets, Resources and Energy and Corporate Advisory and Governance.
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