As Cannabis-related businesses are established and grow, they encounter the same kinds of risks that affect most businesses. Among these is the risk of a liability action against the company and its directors and officers.
In general, these kinds of lawsuits take many forms. Yet in recent months, some cannabis companies have faced one particular type of liability —lawsuits against the companies and their senior management in which investors allege the defendants made misrepresentations about their financial condition or operating performance to the investors’ detriment.
In 2019, fourteen securities class action lawsuits were filed against cannabis companies, alleging violations of the federal securities laws. Four more have been filed so far in 2020. The investor claimants allege, for example, that the company was unable to realize the claimed benefit of a business or production advantage or of a contractual commitment by a third party; the company engaged in misleading transactions or otherwise misrepresented its financial condition or performance; or failed to report regulatory or governmental issues or concerns the company had experienced.
These types of lawsuits are expensive to defend and resolve. While these kinds of securities suits are primarily a concern for publicly traded companies, privately-held cannabis companies can also face serious claims brought by creditors, supplies, customers, vendors, competitors, and regulators.
Cannabis companies need to be prepared to defend themselves against these kinds of claims, and the purchase of D&O liability insurance should be part of their business plan. These types of policies protect both the companies themselves and their directors and officers, providing both defense expense and indemnity protection. In the event of insolvency, a D&O insurance policy could provide the individual directors’ and officers’ last line of defense.
In the current marketplace, the purchase of D&O insurance can be challenging. It is important to consult a knowledgeable insurance advisor experienced with such placements.