Guide to Closing Cannabis Transactions Between Private Companies

By Charles Alovisetti, Elliot Choi, Ben Leonard, Jeremy Shaw

Aug 6, 2020

Closing is the moment when a transaction occurs—the consideration, whether cash or property, is exchanged and ownership transfers. Conducting a closing is one of the more stressful tasks for junior and even senior attorneys. When a deal is ready to close, most of the principals and businesspeople are finished with their work, but lawyers are not out of the woods yet. Far from it, actually.

A good closing will seem completely unremarkable to most of the parties involved unless something goes wrong. And the way to avoid something going wrong is to plan very carefully, triple check your work, have multiple people assist (as it can be hard to spot your errors and omissions), and do not take anything for granted (i.e. you should worry about anything and everything). While much of this article will focus on tasks specific to lawyers, as a business owner it is important to understand all facets of your business operations, including how transactions close.

This article only contemplates transactions between private companies. If public companies are involved, there are additional tasks that will need to be completed. The ins and outs of real estate closings are beyond the scope of this article.

Understand Closing Mechanics

The first thing to understand about closings is that they come in several formats—each of which has its nuances: closings occurring post-signing, closings occurring contemporaneously with signings, and transactions that have initial closings followed by follow-on closings.

Closings Occurring Post-Signing (Separate Signings and Closings)

Some transactions will have a period between signing and closing where the definitive agreements will be signed in advance of the closing. This is typically the case where certain approvals are needed before closing (e.g., cannabis regulatory approval for a new owner or approvals from third parties such as lenders, landlords and significant contractual partners). It means there will be a pre-closing period where the parties are contractually obligated to work together towards closing. The definitive agreements will state what approvals and conditions—called closing conditions—need to occur or be completed during the pre-closing period for the closing to occur. Note that certain closing conditions can only be fulfilled at closing (e.g., delivery of certain items). It is critical to ensure that each of these conditions is ready to be fulfilled at the closing. Some closing conditions can generally be waived. The parties are said to have “closed over” any conditions that are waived.

Simultaneous Signing & Closing

Other transactions will have a contemporaneous signing and closing; however, the initial closing may not always be the only closing. This occurs most often in connection with financings. The definitive agreements will also typically state what approvals and conditions need to occur for the closing to happen. This is a bit of an academic exercise because, in a contemporaneous sign-and-close transaction, the definitive agreements will be signed and the closing conditions will be completed at the same time (e.g. exchange of consideration).

Subsequent and Rolling Closings

Many financing transactions involve multiple closings as additional investors come into a round. Multi-state/license M&A transactions may also have multiple closings as each closing may occur based on obtaining certain regulatory approvals. With multiple closings, it is important to carefully check the definitive agreements, as they will specify what conditions need to occur at subsequent closings and if any additional closing deliverables are needed (e.g., new secretary or closing certificates can be required at subsequent closings). In a financing transaction, the initial closing will usually be the most complex and the subsequent closings will involve less documentation. For multi-state/license M&A transactions, each closing will have unique closing conditions and complexities.

Typical Closing Items

Below is a non-exhaustive list of common items that are prepared and delivered at the closing of an M&A or financing transaction:

Fully executed versions of all definitive agreements not yet executed
Wiring of payments
FIRPTA certificates – often needed in M&A transactions to avoid certain tax withholding obligations
Officer’s certificates – sometimes called closing certificates, they typically contain the relevant resolutions approving the transaction and acknowledging that the representations and warranties made in the agreement are correct as of the relevant date
Good standing certificates – showing the applicable entities are in good standing in their respective states of formation as of the relevant date
Payoff Letter – if debt is to be paid off at closing, this serves as evidence of the repayment
UCC-3 Termination Statements – if debt paid off at closing was secured
UCC-1 Financing Statements – if any new financing is secured
Resignation Letters – in M&A transactions, buyers may want the existing directors and officers to formally resign
Director Indemnification Agreements – if new directors are being appointed to a board, they often want agreements protecting them
Stock Certificates – technically often a post-closing item since they do not get delivered out until after closing
Management Rights Letters – sometimes necessary for VC funds with pension fund investors in complex financings
Third-Party Consents — e.g., lender and landlord consents to a change of control
Amended and Restated Certificate of Incorporation – common in venture financings, this is usually filed with the Delaware Secretary of State at closing
Certificate of Merger – if an M&A transaction involves a statutory merger, this will need to be filed with the applicable Secretary of State
Other deliverables unique to the transaction such as specified regulatory approvals or documents related to ongoing litigation

It is worth noting that certain transactions may require certain items to be delivered a few days before closing. These pre-closing deliverables generally relate to financial matters of a business in connection with any post-closing purchase price adjustments.

Post-Closing Items

In addition to the work required to get to closing, lawyers will need to ensure that critical post-closing items take place and are completed. There are generally two buckets of post-closing items: regulatory filings and ensuring the transaction documents are properly executed and circulated to all parties.

Regulatory filings typically consist of securities-related filings (e.g., filing a Form D and related state notices in a private financing), as well as cannabis regulatory filings that did not need to be made pre-closing. State-level filings are often filed immediately upon closing.

For the second bucket of items, ensuring the transaction has been properly executed involves first preparing an appropriate closing set and updating a law firm’s internal records, and then circulating a copy of the closing set to each party involved. In the past, this meant delivering physical closing sets to the deal parties; but in a digital world, parties often just want PDF copies of all the fully executed agreements and other transaction documents. If stock certificates were issued, these also need to be signed and sent to the appropriate parties. In a secured debt financing, physical stock certificates may need to be sent to the applicable lenders or collateral agents. Finally, if there are future events—e.g., the end of an indemnity or earn-out period—it is generally wise to set calendar reminders so that deadlines do not pass unnoticed.

Technological Updates

Even pre-COVID-19, it was very rare for closings to occur in person in the last decade, despite contrary depictions in the media. These days, almost all closings—apart from some real estate closings—are conducted remotely via the exchange or release of signatures. One other major technological change in deal closings is the use of DocuSign and other electronic signature-obtaining forms rather than PDF scans of executed signature pages. These technologies make it easier to obtain all the necessary signatures, as it avoids having to collect, scan, and compile PDF counterparts of each executed page.

What Can Go Wrong?

Unfortunately, there is an infinite list of items that could potentially go awry in a closing. Here's a handful of common issues to watch out for:

Incorrect or late wiring instructions – Typically, financial institutions need lead time for wiring funds as well as the financial institutions receiving the funds. There have been cases where people have included the wrong wiring information and funds end up in the wrong bank account. Or, more commonly, the numbers included in a funds flow are not correct and the right amounts are not wired. Wires should be coordinated in advance to ensure that funds are sent and received as and when required by the definitive agreements. Even a few minutes can make a difference. For example, a wire intended to be completed on a Friday to pay off a seller’s debt but does not go through to the lender’s account until Monday could result in a lender holding back a release and insisting on an extra three days worth of interest, complicating the flow of funds and requiring adjustments by the parties.
Missing Signature Pages – Missing, incorrectly executed and partially executed signature pages can delay the closing process. Attorneys must always check signature packets received from all parties in detail, as it should not be assumed that pages have been properly executed. Opposing counsel will often fail to check their own client’s signature pages and create a situation where a missing signature page will hold up a closing. Signatories will also inadvertently sign the incorrect signature page or block. Signature packets (i.e. packets containing standalone signature pages of all applicable definitive agreements) should also be compiled and circulated to the appropriate parties in advance to ensure that signatories are available to timely sign and deliver their applicable signature pages for closing.
Formatting and typos in final documents – It is easy to leave in extraneous brackets, incorrect (or no) dates, and/or footnotes in the final execution versions of documents. The only way to make sure the final documents are typo-free is to have multiple professionals carefully review all final documents.
Last-Minute Parties – Forgetting to include a party to an applicable definitive agreement or other transaction document is another part of closing that can go awry. Oftentimes there are parties tangential to a transaction that nonetheless must consent to the transaction. An example would be a minority equity holder of a company whose approval is required to close the transaction pursuant to applicable law and/or the company’s governing documents. Far too often, these minority equity holders are told at the last minute and it can be hard to obtain their signatures with minimal notice. This can be used as a negotiation tactic, as it can reduce the involvement of many voices in the deal, but it can also backfire. Third-party consents may also be required based on the underlying contract. Since the transaction may not be important to the third party, parties may not prioritize the consent or perhaps it was lost in the shuffle of documentation. Required consents should be listed on a closing checklist or schedule to avoid delaying closing because of a missing consent.

Practice Pointers

Checklists

Deal teams should prepare and then constantly work through a closing checklist to ensure the checklist remains complete and up to date, each party understands its responsibilities and that all items are being moved towards closing. Periodic calls with opposing counsel to walk through the checklist should be conducted—there may be purely internal items you do not want to discuss, but both legal teams have an interest in making sure a closing comes off smoothly.
Note on the checklist which parties need to sign which documents and which consents and other items for closing need to be obtained. This will make it easier to confirm you have all the necessary documents.

Signature Pages

It is always best to collect signature pages in advance of closing. This will give the legal teams a chance to confirm they have everything they need and to obtain missing items. Collecting signature pages at the last moment creates the risk of someone getting missed and no time to fix the issue. Note that signatures should not be released until the applicable party has signed off on the execution versions of the definitive agreements.
Typically, the firm that drafted the documents will take responsibility for preparing signature packets for all the parties.
Make sure to separate signature pages for each party—called “breaking out” signature pages. This way if one party’s signature block turns out to be incorrect, or if they mess up the signature page in some other way, the error will not be carried over to all other signatures, which requires multiple parties to have to re-sign.
Do not date signature pages or include document version IDs. These may change and it is a hassle to track down additional signature pages or re-sign them. If you need to change the documents after they have been signed off by a party, always obtain consent to use the previously obtained signature pages.
As you receive signature pages, note so on the closing checklist. A good closing checklist should indicate the signatories to each document. This will make it easier to confirm that all signatures have been received by closing. Again, it is important to avoid a situation where a critical signature is discovered to be missing at the last moment—or worse, post-closing.
When creating fully executed versions of documents, it is important to make sure that the document is complete. This means making sure the correct date is filled in, all bracketed items have been finalized and the brackets have been removed, any “notes to draft” have been deleted, and any attachments/exhibits to the document have been included.

Regulatory Filings

Consider getting certificates that need to be filed with Secretaries of State pre-cleared. If there is an issue with a certificate, it is better to discover it well in advance of closing so there is time to correct it.
Also, make filings on an expedited basis to prevent having to have to wait around for days to obtain evidence of a filing.
Companies like Corporation Services Company and other registered agent service providers can be valuable resources in connection with obtaining or filing state corporate filings and certificates promptly.

Closing Deliverables

If any good standing certificates are required to be delivered at closing, be sure to order these well in advance. It takes time in some states to receive good standing certificates. Also, parties may require “bring down” good standings (typically emails from the applicable Secretaries of State) noting the entity is still in good standing as of the closing.
Legal opinions (decreasing in use) often require a substantial lead time to prepare since they need to be approved by a law firm’s opinion committee. In a multi-state transaction, legal opinions may be required for each state and therefore from multiple law firms. Be sure to make the lawyers aware of the expected closing date so their opinions will be ready in time.

Organization

Make sure everyone is aware of the closing date. This can be particularly important in venture financing deals with multiple investors who will need to agree on a specified date and be prepared to wire money simultaneously. To the extent that a closing relies on regulatory approvals, monitor progress with the applicable regulatory bodies and ensure that all parties are aware of the status of these approvals so that closing can be coordinated smoothly once they are obtained. If closing is to occur within a set timeframe after written notice from your client to the opposing party that such approvals have been obtained, ensure that notice is properly made according to the definitive agreements.
Even in a purely telephonic closing, it could be helpful to set up a conference room to organize documents and meet with your deal team to ensure all signature pages have been received and all closing conditions have been completed.

Post-Closing Items

Clients really appreciate a quick follow-up with a closing set. And it gets harder to remember everything the more time passes after closing. Bottom line: as much as you want a break after a closing, wait until after you have properly collected and distributed fully executed versions of all closing documents to all deal parties. It is also a good idea to ask if people want a physical closing set (e.g., a velo bound set) or an electronic closing set.
Similarly, securities and regulatory post-closing filings typically must be filed within a set timeframe. These filings should be made immediately post-closing to the extent possible to avoid losing the momentum from closing and to avoid any potential late fees or regulatory infractions.

Very few books explain this critical transactional skill. Below are some additional resources, consulted in connection with this article, that may be helpful:

The Corporate, Securities, and M&A Lawyer’s Job: A Survival Guide by Matt Swartz & Daniel Lee has a chapter on closings that is helpful, but is dated (it was written in an era where physical closings were more common).
Practical Law has several articles that provide excellent overviews of the closing process: “Closing Private M&A Transactions Checklist” and “Signing and Closing M&A Transactions”

Insights