Legal Opinions, a Nevada Business Magazine annual feature for nearly a decade, is a compilation of expert knowledge on a variety of topics. Written by attorneys, all of whom are highly educated on their featured topic, this special report is a one-stop resource for executives.
Articles in the 2020 edition of Legal Opinions range from marijuana to politics and working from home. Each provides business leaders with a glimpse into complex legal issues.
New Statutes and Regulations Bring a World of Change to Nevada Cannabis Compliance
By: Alicia Ashcraft and Jeffrey Barr, Partners, Armstrong Teasdale LLP
In June 2019, the Nevada Legislature passed Assembly Bill 533, which restructured the regulation of the Nevada cannabis industry. This new structure has both benefits and challenges. Previous iterations of this article emphasized how critical compliance would be for the cannabis industry. That remains true today, perhaps with added complexity in light of these changes and the global impact of COVID-19.
AB 533, now codified in Nevada Revised Statutes 678A, 678B, 678C and 678D, establishes the framework for the Cannabis Compliance Board (CCB) and the Cannabis Advisory Commission (CAC). The CCB officially took the helm of regulatory authority over the industry on July 1, 2020, and immediately adopted its regulations at the CCB’s first meeting on July 21.
Currently, three of the five members of the CCB have been appointed – former Nevada Supreme Court Justice Michael Douglas, former Nevada Gaming Control Board member Dennis Neilander and Jerrie Merritt, a Senior Vice President of Bank of Nevada. The CCB has authority to adopt regulations and impose discipline, and refer disciplinary actions to the Nevada Attorney General for prosecution.
The CAC, however, was established to study issues related to the industry and provide advisory opinions. The CAC will include the Executive Director of the CCB, the Director of the Department of Public Safety, the State Attorney General and the Executive Director of Taxation. Additionally, the Nevada governor will make appointments to the CAC from those with industry experience, a licensed physician with cannabis or public health experience, a medical patient advocate, a person familiar with the impact of the war on drugs, a licensed attorney who has represented cannabis establishments or medical patients and a person with experience in public health or food safety.
NRS 678A, B, C and D made other important changes for the Nevada cannabis industry such as establishing subcommittees and studies for various areas of concern, reworking the requirements for ownership background checks and approvals, and modifying the process and criteria for issuance and renewal of licenses. Although not subject to the Nevada Administrative Procedures Act, the statutory structure for the CCB provides for the right to petition for judicial review of the agency’s actions.
The regulations of the Nevada Cannabis Compliance Board (NCCR) have the look and feel of the regulations for the Nevada Gaming Control Board. Generally, NCCR 1-3 cover the issuance of regulations and definitions, as well as the organization and administration of the CCB and CAC. NCCR 4 and 5 deal with disciplinary proceedings, licensing, background checks and registration cards. NCCR 6- 10 provide for the production and distribution of cannabis products and minimum good manufacturing practices. NCCR 7, 8, 9, 11 and 13 are specific to each of the license categories issued by the CCB – sales facility, cultivation facility, production, testing facilities and distributors. NCCR 12 contains provisions for packaging and labeling, and NCCR 14 establishes workplace requirements. Key changes in the regulations for consideration are:
NCCR 4 makes significant changes in the categories of violations for a licensee and the penalties for those violations. Some violations were increased to higher categories, carrying more serious regulatory action and fines, while a few other violations were newly added.
NCCR 5 contains the most changes from the prior NAC 453D. This regulation establishes that any license issued is a revocable privilege and that the burden is on the applicant to prove qualification. The CCB has increased its reach under NCCR 5, broadening the categories for evaluations, the types of transactions regulated, and authority relating to inspections and investigations.
NCCR 11 reflects more stringent regulations for testing facilities, echoing the CCB’s mission of addressing some of the testing issues that have arisen in the last few years.
These changes, and increased penalties for violation, underscore the significance of compliance for those operating in the industry. While Nevada’s cannabis regulatory structure has been changed, the industry remains strong as we look to 2021.
Limited Liability Company Operating Agreements – What You Need to Know
By: Jessica Moyeda, Associate, Brownstein Hyatt Farber Schreck
A limited liability company (LLC) is often selected as a business entity due to its inherent flexibility. But such freedom cuts both ways should the members fail to delineate the terms governing the operation and management of the LLC, or simply rely on Nevada statutory provisions to provide the operating rules for the company. Recent changes to Nevada’s LLC laws highlight the importance of formulating an operating agreement that is tailored to a company’s specific needs and goals and that also provides a framework for how members and managers will interact.
Importance of an Operating Agreement – Why Do I Need One?
A written operating agreement sets forth the mutual understanding of the members and managers that, especially in the event of a future dispute or misunderstanding, can provide essential guidance for all parties involved.
If the members fail to adopt an operating agreement, or the operating agreement does not address essential matters, then the default provisions of Nevada Revised Statutes (NRS) Chapter 86, which governs LLCs, will control. Such default rules do not always provide terms or rules that the parties would have chosen for themselves. As a result the company may find itself operating under rules that the members did not envision.
For example, NRS Chapter 86 does not directly specify the fiduciary duties of members and managers, as NRS Chapter 78 does for directors and officers of corporations. Notably, effective in October 2019, the Nevada Legislature amended NRS Chapter 86 to confirm that the duties of a manager or managing member are only the contractual duty of good faith and fair dealing and any other duties expressly prescribed by the company’s articles of organization or operating agreement. As such, the only way to ensure that the LLC functions as the members wish is to adopt a comprehensive operating agreement with provisions (such as the fiduciary duties, if any, of managers and members) that best suits the members’ intentions as to the company’s business and management structure.
What to Consider When Drafting an Operating Agreement
Although each operating agreement is different, it should generally set forth the following fundamental terms:
Finance/Capital: An operating agreement should describe the type and amount of capital contributed by each member at the outset and the corresponding ownership percentage of each member.
Other items to consider are: Who will decide if or when the company requires additional capital and what amount, if any, is required from each member? If any member fails to make a contribution, will there be any dilution of his, her or its interest in the LLC?
Management: Describing the manner in which the LLC will be managed is also critical, i.e., by its members, by a managing member, or by one or more managers.
Other management items to consider and address are: Will any major decisions be reserved to certain individuals or be subject to special approval requirements? Will the LLC have officers and, if so, what will be their roles, responsibility and authority? How will deadlock situations be resolved?
Transfers of Member Interests: An operating agreement should also specify when, and under what conditions, a member may transfer his, her or its interest.
Other issues to consider are: Will there be any restrictions or conditions regarding transfers, such as requiring the approval of a percentage or all of the other members, the manager(s) or the managing member? Will certain kinds of transfers be permitted, such as transfers to family members or trusts for estate planning purposes?
Other special items that should be addressed in the operating agreement, if applicable, include: Will the LLC be engaging in a regulated industry, such as gaming or the sale or distribution of liquor? Will members be entitled to buy out other members in the event of bankruptcy, divorce, death, finding of unsuitability or other major events?
Addressing at least some of these fundamental issues and questions will provide a solid framework for resolving disputes and ensure that the company operates in accordance with its members’ preferences.
The Intersection of Law and Business:
The Duty to Understand the Constitutional Principles Upon Which All American Institutions Rest
The American experiment is unlike any in the history of the world. As James Madison explained, in Europe, charters of liberty have been granted by power. But America set the example of charters of power granted by liberty. America was to have its success, if at all, based upon a government established by the consent of the governed. Americans chose a democratic republic; a government enabled by express, limited power granted by the people to guaranty and protect their individual freedom. And it would be memorialized forever in their written law—the U.S. Constitution. Thus began the American experiment. By any objective measure of history, America has been an unprecedented success. This nation has made greater advances in science, medicine and education. It has created more wealth, commerce and prosperity among its people, and in the shortest period of time, than any other nation in the history of the world. America’s businesses and innovations are unparalleled. Yet today, relatively few truly understand how law has made this possible. Every citizen, should make time to study and understand the U.S. Constitution, its words, and principles.
To begin, remember the six reasons “We the People” instituted and empowered our government in the first place. They are found in the Preamble of the U.S. Constitution. America’s government is ordained and established for these express purposes: (1) to form a more perfect union; (2) establish justice; (3) insure domestic tranquility; (4) provide for the common defense; (5) promote the general welfare; and (6) secure the blessings of liberty to ourselves and our posterity.
If government action is not doing these things, it’s likely acting outside the people’s granted authority. Similarly, if business institutions and their leaders are engaging in action that compromise these fundamental six purposes, they, too, are acting contrary to their ultimate best interest, and, in the end, endanger the very economic system that sustains them.
Next, understand the fundamental principles upon which America’s government is based. These ideas promote good government and limit the action of those entrusted to serve within it.
- Popular Sovereignty. The people are the only lawful source of government power. Government is chartered by limited, enumerated The Duty to Understand the Constitutional Principles Upon Which All American Institutions Rest powers to be exercised as authorized by the people according to law.
- Federalism. Division of powers between state and federal government must exist to diffuse centralized power.
- Separation of Powers. The people’s government has three coordinate and equal branches to diffuse power: the Legislative, Executive and Judiciary. Each has unique abilities to check and balance the others.
- The Bill of Rights. The people’s enumeration of certain unalienable rights that are inviolable by government begin with freedom of religion, speech and press, the right to peaceably assemble and the right to petition the government for a redress of grievances. No action by government, nor commerce, should subvert these rights.
- The Rule of Law. All citizens are governed by and held accountable to laws that are just, publicly promulgated, equally enforced and independently adjudicated. Vague, incoherent, arbitrary or capricious law dictated by the whim of politicians is no law at all.
Adherence to these foundational Constitutional principles prospers nations and their economies. Thomas Jefferson taught: “the natural progress of things is for liberty to yield, and government to gain ground.” Years later, he offered this foresighted counsel concerning the intersection of law and business: “a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned—this is the sum of good government[.]”
The success of a republic is never inevitable. It is not enough to believe in democracy, in liberty, in free enterprise, or in justice under the law. We must know and understand the Constitutional principles that make these noble pursuits possible.
Taking Your Political Passions to the Next Level
By: Daniel H. Stewart, Partner, Hutchison & Steffen
It seems like politics has seeped into every corner of our lives – from school, to work, to the shows we watch, the friends we make, and the foods we eat. Politics is ever-present. And yet for most, political participation does not extend much beyond yelling at TV and computer screens, engaging in social media, and voting.
As an election lawyer, I often field questions from potential clients who want to separate themselves, however slightly, from most everyone else with political opinions. These potential politicos are often savvy enough to speak the lingo. “I’d like to form something like a ‘PAC,’” they say. “But I have no idea how to do it.”
A “PAC,” for those who don’t know, is a “political action committee.” Or, in Nevada, a “committee for political action,” as set by NRS 294A.0055. Most people with even a passing familiarity with politics have heard of PACs, but few truly understand the contours. That’s ok. If you know enough to ask a lawyer about a PAC, you know enough to get the ball rolling.
Under state law, PACs serve a very specific function: they are groups of people or entities who come together to raise money and make expenditures to influence the elections. Unlike individual candidates for office, who cannot receive contributions in excess of $10,000 from any one donor, there are no contributions limits for PACs. A single donor could give billions if he or she wanted to.
In their purest form, PACs are little more than a name and a bank account. Individuals raise money on behalf of the PAC and then make contributions of that money to campaigns. For example, you could set up a PAC dedicated to supporting candidates committed to increasing education funding. You raise money from likeminded supporters who trust you to then give that money to likeminded candidates. In this way, PACs can be very efficient in helping good candidates win campaigns.
The other common types of PACs are those dedicated to independent expenditures on behalf of candidates or causes. Here, rather than cut, at most, a $10,000 check to an individual candidate, a PAC engaged in independent expenditures may spend unlimited amounts of money independently advocating for candidates via mail, door-to-door, TV, radio, billboard, internet, skywriting, or anything else you dream of. Even though state law is somewhat murky on this point, the one major rule I give to clients running independent-expenditure PACs is to prohibit coordination with the campaigns they are helping. Independent means independent.
Forming and running a PAC is not that hard or complicated. You simply have to identify your name, officers, resident agent, purpose, and affiliated PACs (if any) on a form provided by the Secretary of State. Once created, the PAC will need a bank account that tracks all funds in and out. Like individual campaigns, state law mandates that all PACs submit their annual and quarterly Contribution and Expense Reports through the system established by the Secretary of State. That means disclosing all of the PAC’s contributions (its donors) and expenditures. PACs are more than just vehicles for political advocacy; they are also tools for transparency.
Are you ready to make your political commitment official, and to separate yourself from political amateurs? Are you ready to make a real difference in your state and community? If so, a PAC may be a perfect place to start. It is an inexpensive and relatively simple step that could help you become an effective political player and make positive and meaningful changes in Nevada.
The “Argue from the Home” Era
By: Jordan T. Smith, Partner, Pisanelli Bice
The COVID-19 pandemic has thrust the world into the W.F.H. – “Work from Home” – Era. To adapt in this new environment, most businesses now operate remotely (if at all), and employees collaborate around a videoconference instead of a conference table. Appellate courts have adjusted too. Like their private sector counterparts, many courts have started conducting oral arguments in apps like Zoom rather than in the courtroom. The judiciary is officially in the A.F.H – “Argue from Home” – Era.
For example, as governments imposed shutdowns in March 2020, the Ninth Circuit Court of Appeals allowed participants to appear for oral argument by videoconference. The next month, the Nevada Supreme Court entered an administrative order permitting “oral arguments in individual cases by videoconferencing or other remote means.” The transition to A.F.H. was relatively smooth for these courts. Both tribunals already allowed some judges or lawyers to appear by video and they live-streamed oral arguments before the contagion.
The most historical development came from the United States Supreme Court. The High Court has notoriously refused to live stream its proceedings. But, in May 2020, the Court held its first-ever telephone oral arguments with live audio. In person, the Justices often pepper the advocates with rapid-fire questions. However, on the phone, the Justices took turns asking questions in order of seniority, with each Justice allotted two minutes. The novel format prevented Justices from inadvertently talking over one another and turning the arguments into a melee. The coronavirus-induced live audio also unmasked some of the Court’s mystery for the public.
Remote oral arguments present unique challenges for advocates. The most effective arguments have the tone of a professional conversation between colleagues. The goal is to develop a rapport with the court. The discussion should not be excessively stiff or overly pally. As the late Justice Scalia explained, “counsel’s implicit message to the court is ‘Let us reason together.’”
Yet no matter how advanced the technology, it is harder to connect with the court through an internet connection. Still, there are some practices that help. First, counsel should resolve the technological logistics long before the argument. Moot courts are essential to prepare the argument’s substance and presentation. Lawyers should moot court the technology as well. Test the app or link, the speakers, microphone, camera, and camera angle.
Second, counsel should replicate the in-court experience as much as possible. While work attire may have devolved to pajamas during quarantine, lawyers should still dress formally for their arguments. Counsel should also conduct the argument in a formal venue. Avoid distracting backgrounds or noises, like barking dogs or loud email notifications. Use the mute button (there was an audible toilet flush during one of the first telephonic Supreme Court arguments). And remember the camera is always on.
Next, advocates should look at the judges and maintain “eye contact” just as they would do if everyone were in the same room. Lawyers should resist the temptation to face their notes on a second computer screen positioned away or above the camera. Remember, unlike the judges, the second screen doesn’t vote on the outcome.
Similarly, the impersonal nature of video arguments should not encourage lawyers to simply read from a prepared script. Reading directly from notes gives the impression that the lawyer is talking at the judges instead of reasoning or having a conversation with them. Mechanical reading also hinders the advocate’s ability to effectively answer the court’s questions. Finally, readers tend to speak faster, which can be hard to follow in normal conditions and almost impossible to follow if there is any internet lag or garbling.
Videoconferencing has alleviated some of the operational side effects that the COVID-19 pandemic has inflicted on businesses and courts. Appellate practitioners need to adjust to the new – and hopefully short – A.F.H. Era.
Bankruptcy Basics for Businesses
By: Blakeley Griffith, Associate, Snell & Wilmer
The current health crisis is causing an economic downturn and placing stress on businesses – big and small. As such, it may be important for businesses to be familiar with basic bankruptcy principles in an effort to avoid violating any of the Bankruptcy Code or Rules.
The Two Main Types of “Business Bankruptcies”
A person or entity that files for bankruptcy is called a “debtor.” A “creditor” is a person or entity that has a claim (normally for money) against the debtor. The most common chapters under which businesses file for relief are Chapter 7 and Chapter 11. Individuals may also file under both chapters.
Chapter 7 is a liquidation. It is most often used by businesses that are no longer operating or individuals who wish to liquidate their assets to pay creditors. Typically, in these cases, a trustee is appointed and sells all of the debtor’s assets. The trustee then uses the proceeds of the sale to pay creditors’ claims.
Chapter 11 is frequently referred to as a “reorganization” bankruptcy or a “business” bankruptcy, as it is often used to reorganize a business while the debtor remains in control. To make things a bit easier, the Bankruptcy Code has a special subchapter to streamline the process for small businesses.
The Automatic Stay
Under both chapters, the automatic stay provides a period of time in which all collection and enforcement activities against the debtor or its property (which becomes property of the bankruptcy “estate” upon filing), including foreclosures and repossessions of property, are suspended and may not be pursued by creditors without court relief. The automatic stay goes into effect automatically when the case is filed. If a creditor violates the automatic stay, it may be subject to sanctions by the bankruptcy court.
If a creditor has received a payment from the debtor within 90 days of the debtor’s bankruptcy, the payment to the creditor may be subject to the debtor or trustee’s “avoiding powers” as a preferential transfer. Essentially, the debtor or the trustee can cancel the transaction and force the return of funds from the creditor. The returned funds would then be used to pay all creditors. The purpose of these powers is to avoid unfair prepetition payments to one creditor at the expense of all creditors.
The Bankruptcy Plan
The main focus of a Chapter 11 bankruptcy is approval of the debtor’s plan of reorganization. Among other requirements, for the plan to be approved by the bankruptcy court, creditors and other parties in interest must vote to accept or reject it.
When a plan is approved, the debtor is required to make plan payments pursuant to the plan and is bound by the provisions of the confirmed plan, along with creditors and other claimants whose rights are affected by the plan. The confirmed plan creates new contractual rights, replacing or superseding pre-bankruptcy contracts.
Unexpired Leases/Executory Contracts
In Chapter 11 cases, debtors have the option to assume or reject unexpired leases and other “executory contracts.” An executory contract is a contract under which the parties still have duties to perform. While the debtor decides to assume or reject the unexpired lease or executory contract, the creditor must continue performance. A business cannot stop acting according to leases or contracts with a customer just because that customer files for bankruptcy.
If the debtor assumes an unexpired lease or executory contract, the debtor must cure any defaults and continue to perform under an assumed lease or executory contract. If the debtor rejects an unexpired lease or executory contract, then the lease or contract is treated as though it were breached on the day the debtor filed bankruptcy (also known as the “petition date”).
The Importance of Understanding Bankruptcy Basics
Nearly every business will, from time to time, interact with a customer, vendor or account in bankruptcy. The Bankruptcy Code and Rules are complicated, and it’s important for businesses to understand these basics to help limit their liability and protect their interests in a bankruptcy case.
Disclaimer: Nothing contained herein is to be considered as the rendering of legal advice for specific cases or circumstances. The materials herein are intended for educational and informational purposes only, and they solely reflect the views of the individuals who prepared and compiled them.