Oregon Marijuana Laws: The Status of Residency Requirements After HB 3400 (Part 2)

On July 17, the Oregon Liquor Control Commission (“OLCC”) distributed to members of the Licensing, Compliance, and Enforcement Technical Advisory Subcommittee an initial draft of certain rules that would affect the residency requirements for Ballot Measure 91 businesses.

The most relevant provisions relating to residency are as follows:

Definitions

() “Applicant” means any individual:
(a) Having a financial interest in the business for which licensure is sought and who is directly involved in the management of the business; or
(b) Who owns 51% or greater interest in the business proposed to be licensed; or
(c) Any individual who is a managing member, partner or director or officer of a legal entity if the legal entity owns or operates the business for which licensure is sought.

() “Financial interest” means having an interest in the business such that the performance of the business causes, or is capable of causing, an individual or a legal entity with which the individual is affiliated, to benefit or suffer financially, and such interests include but are not limited to:
(a) Receiving, as an employee or agent, out-of-the-ordinary compensation, either in the form of over-compensation or under compensation;
(b) Renting or leasing real property to an applicant or licensee for use by the business;
(c) Lending money, real property or personal property to an applicant or licensee for use in the business;
(d) Giving money, real property or personal property to an applicant or licensee for use in the business; or
(e) Being the spouse or domestic partner of an applicant or licensee. For purposes of this subsection, “domestic partners” includes adults who share the same regular and permanent address and would be financially effected by the success or failure of the business as well as adults who qualify for a “domestic partnership” as defined under ORS 106.310.

845-025-XXXX
Applicant and License Qualifications

(1) An applicant must:
(a) Be at least 21 years of age; and
(b) Until January 1, 2020, have been a resident of Oregon for at least two consecutive two years [sic]prior to the date the initial or renewal application was submitted.
(2) Individuals listed as applicants on an initial or renewal application, or identified by the commission as an applicant must maintain Oregon residency while the business is licensed.

Here is my analysis:

Observation #1 – The OLCC seems much more concerned about non-resident managers than non-resident owners. For example, it appears that a non-resident individual could own up to a 50.99% interest in a licensee, so long as the non-resident individual is not a manager, partner, director, officer, or otherwise directly involved in management. In fact, it would appear from the rules that 100% of the ownership interests of a licensee could be owned by non-residents so long as: (1) no individual non-resident owned a 51% or greater ownership interest; and (2) the owners hired an Oregon resident to be the sole manager of the business.

Observation #2 – Certain words and phrases in the rules are either ambiguous, or are not sophisticated enough to capture scenarios that are common in organizing and structuring businesses.

For example, the term “directly involved in the management” is not a phrase that is typically used by businesses or business law attorneys. The phrase may have come from Representative Ann Lininger’s oral legislative history (which was mentioned in Part 1 of this series), where she stated that the definition of applicant was intended only to include a person who “directly manages” the business. However, the line between “direct” and “indirect” involvement in the management of a business is definitely not self-evident. A more commonly-used phrase (and perhaps this is what Representative Lininger and the OLCC are trying to get at) is the term “ordinary course of business”, which is usually used to distinguish between: (1) day-to-day operational decisions that are generally made by managers or officers; and (2) more significant decisions that are generally made by members, shareholders, and directors. However, even that distinction is unclear, and what might be the ordinary course of business for one company may not be the ordinary course of business for another. Another commonly-used phrase is “control,” which usually means that one or more individuals have a majority of the voting power.

As another example, the term “51% or greater interest” could, in some circumstances, be ambiguous. Not every entity has only one class of ownership interests, and some owners may have the right to receive preferential returns for a period of time. In a typical preferential return scenario, a cash investor may have the right to receive 100% of the distributions from the entity until such time as the investor recoups the entire amount invested, and then, after receiving such amount, would have the right to receive a lesser percentage of all future distributions. Depending on the numbers and percentages before and after recoupment, it may be unclear whether an individual would be considered the owner of a “51% or greater interest.”

Observation #3 – The policy behind the rules is difficult to discern. Like most sets of line-drawing rules, there are scenarios that can be articulated that make the rules seem nonsensical. For example, a corporation having only Oregon shareholders and only Oregon directors would nevertheless be disqualified merely because it hired a single non-resident officer as an employee. On the flip side, as was noted above, an entity having no Oregon owners could obtain a license merely because it hired an Oregon resident to be the sole manager.

Observation #4 – The draft rules may be inconsistent with Sections 12, 14, 15, and 16 of HB 3400. As was mentioned in Part 1 of this series, the phrase “an applicant listed on an application” in Sections 12, 14, 15, and 16 of HB 3400 arguably indicates that only one individual listed on the OLCC application needs be an Oregon resident. Also, although the OLCC may have considered Representative Lininger’s oral legislative history when drafting clause (a) of the definition of “Applicant,” the OLCC disregarded the other portion of her legislative history where she stated that the definition of “Applicant” for residency purposes was intended only to include a person who “directly manages” the business. Therefore, clauses (b) and (c) of the definition of “Applicant” in the draft rules are inconsistent with Representative Lininger’s legislative history. (In a subsequent part of this series, I will discuss the possibility that the residency requirements for a marijuana license violate the Commerce Clause of the U.S. Constitution.)

Recommendation to the OLCC

To the extent that the OLCC is going to promulgate rules that impose residency requirements, the OLCC should consult with one or more experienced business law attorneys to ensure: (1) that there are no ambiguities in the rules; and (2) that the rules are sophisticated enough to capture scenarios that are common in organizing and structuring businesses. Additionally, and ideally, the rules should contain “safe harbor” provisions that make clear that certain business organizational structures will not violate the rules.

What to Do

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. 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.

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