Although the federal government seems to have turned a blind eye to the legalization of the medical and even recreational use of cannabis in certain states, they have not relinquished their duty to maintain competitive markets in the U.S. Over the past year, the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) have used their powers under the Hart-Scott-Rodino (“HSR”) Antitrust Improvements Act of 1976 (the “HSR Act”) to investigate mergers and acquisitions in the cannabis market, even though the operations of such business are essentially illegal under federal law.
The HSR Act was established to provide a way for the federal government to review pending merger and acquisition transactions in the U.S. to prevent anticompetitive deals from being closed. In its simplest terms, parties to a transaction that meet or exceed certain asset or sales values, or are engaged in a transaction that meets or exceeds certain value thresholds, must put the FTC and the DOJ on notice of the transaction. After an HSR filing has been completed by both parties, there is a specified “waiting period” (depending on the type of transaction) for the agencies to review the filings. If the waiting period expires or is terminated early, then the parties can proceed to close the deal. If one or both of the federal agencies make certain requests, however, the deal is placed on hold until the requests are satisfied. The issuance of what is known as a “second request” typically requires the parties to the transaction to provide numerous documents and information, which can be both time-consuming and expensive. The federal agencies could also choose to reject the transaction entirely.
In 2019, the DOJ issued at least seven second requests on pending mergers of companies engaged in the cannabis market. These requests were not issued in connection to the fact that cannabis is an illegal substance under federal law, but rather to ensure the transactions don’t raise any antitrust concerns. Letters from the DOJ did mention, however, that they might share the submitted information with other parts of the department – and the Drug Enforcement Administration just so happens to fall under the DOJ umbrella. A few key players in the industry have argued that requests from federal agencies in connection to anti-competition concerns are unfounded since the cannabis market is largely regional and is not generally active in interstate commerce. Second requests have also led to strains on cannabis stocks, decreases in the transaction value during the compliance process, and arguably contributed to the death of cannabis deals altogether.
Fortunately, it appears that over the past few weeks, the DOJ has released some of the pressure it placed on cannabis transactions, as companies in the industry have reported that either the initial HSR waiting period expired without subsequent requests, or that the transaction was found to be in compliance with the HSR Act. Of course, only time will tell whether cannabis transactions will continue to be permitted, and whether such progress will positively impact the cannabis market.