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| 1 minute read

A possible explanation for HSR delays in the cannabis industry

Friends – one of the more esoteric aspects of doing deals (acquisitions, private equity investments) is antitrust – the law of competition (or, more importantly, unfair competition). When one company buys another, or one company invests in another, and the dollar amount is large enough, federal antitrust law steps in to make sure that the marketplace remains competitive (although the federal government can step in and block any deal of any size if they think it raises competitive concerns). The primary regime for U.S. antitrust review of most deals currently over $94 million by the Department of Justice and the Federal Trade Commission is Hart-Scott-Rodino (HSR) clearance (note that I am very much intentionally glossing over the vast complexity of the HSR process to keep this interesting).

As some of you may remember, back in 2019, in the heyday of high-valuation cannabis deals fueled by all (or nearly all)-stock deals, many acquisitions lingered for months in HSR review. Indeed, that delay was potentially one of the causes of many deals to either be recut or terminated because valuations dropped (industry-wide) while companies waited for HSR clearance and responded to voluminous requests from the FTC and DOJ. (link)

Yesterday, as various news sources have reported (link, link, link), John Elias, a Justice Department official in antitrust, has testified in writing to the House Judiciary Committee alleging that U.S. Attorney General William Barr caused the Department of Justice to use its “antitrust power to investigate 10 proposed mergers and acquisitions in the marijuana industry because Mr. Barr ‘did not like the nature of their underlying business.’,” as reported by the New York Times. “At least one merger fell through and stock prices dropped as a result, he said, even though there was never a justification in competitiveness analysis — like whether the companies trying to merge would have too much market share — for using antitrust powers to essentially harass the firms. (link)

If these allegations are true, at least now the industry would have an explanation for much of the turmoil caused by the 2019 HSR delay problem, and another reminder that, until non-hemp cannabis is descheduled, federal agencies are not going to do the industry any favors.



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