Issues with investing in medicinal cannabis: business associates and the fit and proper person criteria
This update forms part of a series on the medicinal cannabis industry in Australia and considers:
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:
Failure to satisfy these criteria can result in the alteration or revocation of the relevant licence, which may be fatal to the business.
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:
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).
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):
For natural persons, the ODC can similarly have regard to:
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.
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.