Oregon Marijuana Laws: The Status of Residency Requirements After HB 3400 (Part 4)

In Part 3 of this series, I discussed the residency rules for Ballot Measure 91 businesses that the Oregon Liquor Control Commission (“OLCC”) distributed to members of the Rules Advisory Committee on August 14. The OLCC has not yet made any changes to those rules. However, there is some news to report.

On September 3, Amy Margolis and I met with Steve Marks (Executive Director) and Jesse Sweet from the OLCC to discuss the residency rules. The purpose of the meeting was not to debate the merits of the OLCC’s policy decisions regarding residency. Rather, we were there to: (1) find out what the OLCC’s policy was in the first place; and (2) discuss ways in which: (a) the language in the rules could be clarified; and (b) certain common business organization structures could be specifically addressed. Our firm’s only goal was to attempt to assist the OLCC in making the rules as clear as is reasonably possible, so that license applicants will have some relative certainty (before they file their applications!) that their business organization structures are permissible under the rules. We informed the OLCC that our firm does not support residency requirements and that, in fact, we were reserving the right to assist one or more of our clients in challenging the residency rules.

OLCC’s Current Policy

We were informed that the OLCC’s policy is as follows:

1. Ownership – 51% of the ownership interests must be owned by two-year Oregon residents.
2. Management – 100% of the individuals who are directly involved in the operation or management of the business must be two-year Oregon residents.

In Part 3 of this series, I expressed skepticism that the OLCC meant what it was actually saying in the August 14 version of the rules. Either my skepticism was valid or my analysis was partially incorrect, because my interpretation of the OLCC’s August 14 rules concerning management that I stated in Part 3 is not consistent with the OLCC’s management policy stated above. No matter. I now am suggesting that everyone should ignore my management conclusion from Part 3 and consider the above management policy to be the OLCC’s current position, even if the current version of the rules doesn’t exactly say that.

Clarifications / Safe Harbors

At the meeting and in subsequent correspondence, I proposed several clarifications and safe harbors to the OLCC.

On the ownership side of things, I proposed clarifications and safe harbors for: (1) options to purchase ownership interests; (2) convertible promissory notes; (3) preferential distribution rights based on return of capital contributions; and (4) security interests.

On the management side of things, clarifications and safe harbors are particularly important because the numerical threshold (100%) is so high and the substantive threshold (“direct involvement in the operation or management of the business”) is so vague. Of utmost importance, is what exactly does “direct involvement” mean? In Part 2 of this series, I noted that the term “direct involvement “ is not a phrase that is typically used by businesses or business law attorneys. Without clarification, there is simply no understanding what it means. I proposed limiting its definition to participation in the control of day-to-day ordinary course of business matters. There is statutory precedence for such line-drawing. Under the Oregon Business Corporation Act, the Oregon Limited Liability Company Act, and the Oregon Limited Partnership Act, certain major decisions are “kicked up” to the ownership level, while day-to-day ordinary course of business matters are dealt with at the management level. For example, the Oregon Limited Liability Company provides that in a manager-managed LLC, all decisions are made by the managers, except for certain major decisions (which are specified in the statute) that require the consent of the members. See ORS 63.130(2-4). For the OLCC’s residency requirements, it would be beneficial to know that the right to vote on certain decisions that are outside the ordinary course of business does not constitute “direct involvement” in the operation or management of the business.

Legal and Political Pressure

All of our clients should assume that the OLCC’s current policy will, in fact, end up being the policy in the final version of the rules. However, there is always a chance that the OLCC could be affected by certain legal and political pressures.

1. Legislative Counsel Committee Legal Memorandum – At the request of Representative Ann Lininger, Oregon’s Legislative Counsel Committee issued a memorandum that concluded that Oregon House Bill 3400 does not permit the OLCC to impose residency requirements on mere owners of a business. The memorandum was written by Deputy Legislative Counsel Mark Mayer and is dated July 28, 2015 (although it was just recently delivered to us). The memorandum’s legal conclusion is as follows: “For purposes of [Ballot Measure 91 and Oregon House Bill 3400], an “applicant” is a person that participates in the management of the business, owns the business outright or otherwise has the power to control the operations of the business. An “applicant” is not a person that merely has an ownership interest in the business.” The OLCC’s current 51% ownership policy directly conflicts with this legal opinion, and so it will be interesting to see if the OLCC agrees or disagrees with the memorandum.

2. Legislative Days – Members of the Oregon legislature are convening for “Legislative Days” from September 28 through September 30. During Legislative Days, various committees hold informational hearings to hear updates on the implementation of past legislation and to consider potential future legislation. The OLCC’s position on residency requirements could be a topic of discussion, especially in light of the Legislative Counsel Committee’s memorandum.

3. Legal Challenge – A lawsuit could be filed challenging some or all of the residency rules. The ownership requirements could be challenged based on the reasons set forth in the Legislative Counsel Committee’s memorandum. Additionally, all of the residency requirements could be challenged on a constitutional basis. In a subsequent part of this series, I will discuss why the residency requirements probably violate the U.S. Constitution.

4. Oregonian Editorial Board – On September 5, 2015, the Oregonian Editorial Board published an editorial opposing residency requirements for owners.

What to Do

Our overall advice has not changed. If your business is seeking an investment from one or more out-of-state investors, or if your business already has one or more out-of-state owners, and if you haven’t already discussed the issue with us, contact us today to do so. Additionally, if your business is made up entirely of out-of-state owners, and if you haven’t already done so, you should begin searching for one or more Oregon residents who you might be willing to make a co-owner or a manager, director, or officer.

Continue to stay tuned to our blog, as we will post any updated residency information when we receive it.