National cannabis conglomerate Acreage Holdings has conceded that its contracts with local license applicants in Massachusetts are “inoperable,” after regulators warned the arrangements appear to grant Acreage control of the smaller companies and could violate state law.
In a report published this week, investigators for the Massachusetts Cannabis Control Commission said management services and loans Acreage provided to two firms — Patient Centric of Martha’s Vineyard, or PCMV, which is seeking recreational licenses in West Tisbury and Framingham, and Health Circle, which is working to open marijuana stores in Rockland and Marshfield — may put Acreage “in a position to control the decision-making” of PCMV and Health Circle.
Under state law, a single company may own or control only three marijuana stores. With Acreage already pursuing licenses in Worcester and Shrewsbury under its directly owned Botanist brand, investigators wrote in their report, the New York-based firm would eventually exceed the three-store cap if the commission issued final licenses to all its affiliates.
“One of the things we’ve really been concerned about is the management contracts and what those relationships are and whether they form — implicitly or explicitly — a controlling relationship,” said cannabis Commissioner Britte McBride at a public meeting of the agency Thursday.
She added that the Acreage contracts appear to contain "control or elements of decision-making that could look a lot like control on the part of the part of the parent company."
The company, whose board of directors includes former US House speaker John Boehner and former Massachusetts governor Bill Weld, declined to comment.
According to the commission's investigative report, Acreage recently told regulators it would rewrite its intertwined loan and management deals with PCMV and Health Circle to eliminate problematic clauses.
Those include requirements that the smaller firms use only Acreage's services, have their annual budgets approved by Acreage, and obtain Acreage's permission before changing their boards of directors or hiring employees — or even giving them raises.
The deals also directed the companies to pay Acreage eye-popping sums: In PCMV's case, it would have owed Acreage 1.5 percent of its revenue, plus $10,000 and 25 percent of its quarterly earnings, while paying back Acreage a $4 million revolving credit loan with 15 percent interest.
Under Health Circle's contract, meanwhile, the company would have paid Acreage $1,825 for every pound of marijuana it sold, plus 15 percent interest on an $8 million credit line.
Breaking the management contract would have caused both firms to lose their financing.
"The contractual arrangements between the Applicant’s parent company and the affiliates contain provisions that the Commission may deem to be controlling interests," investigators for the agency wrote in the report. "However, these are inoperable agreements and Acreage has committed to construction of terms and an intention to reform provisions consistent with noncontrolling interests."
Acreage further said it had terminated its consulting and management deal with yet another affiliate, Mass Medi-Spa, according to the commission report. Former Acreage president George Allen previously told the Globe that Acreage outright owned Mass Medi-Spa.
Acreage, in its Botanist license applications, disclosed its management contracts with other applicants. But the company insisted the deals did not give it legal control of the smaller firms, an assertion that appeared to rankle Commissioner Shaleen Title.
"I’m very concerned about an arrangement that's specifically referred to in the regulations not being represented as a controlling relationship," Title said at the agency's meeting. "That's a suitability issue to me, for both current and future licenses."
Title added she wasn't prepared to approve the Botanist licenses Thursday, even if doing so wouldn't yet put Acreage over the three-license limit.
The commission report noted that Acreage issued joint responses “on behalf of” Health Circle and PCMV. Acreage has also said in past investor presentations that it was “doing business as” Health Circle in Massachusetts, while various past directors of the smaller firms appear to have deep personal or business ties to Acreage, including its dispensaries in other states.
The company’s management and loan contracts were the subject of a Globe Spotlight Team report last year, which questioned whether Acreage and another large multistate cannabis operator, Tilt Holdings, were attempting to subvert the license cap — a policy meant to ensure a fair playing field for smaller, locally owned firms and prevent large operators from gaining too much leverage over state regulators.
Tilt has also backed away from its management contracts under regulatory pressure.
While the details of any new arrangements Acreage might sign with its affiliates remain unknown, any changes threaten to reduce the company's expected footprint and revenue in Massachusetts, where it had once promised investors it would open a number of stores and cultivation facilities.
At its meeting Thursday, the commission postponed votes on provisional recreational licenses for Acreage's Botanist subsidiary, instead directing its staff to issue an opinion on whether the contracts amount to control and whether Acreage already controls too many medical marijuana licenses.
"I think we need to have a determination about whether we have an applicant that’s over the cap limit before we can proceed with looking at these other applications" for recreational licenses, McBride said.
The commission last year tightened its regulations around control. Under the new rules, any person or entity that makes certain key business decisions or derives more than 10 percent of a company's profits is deemed to have control.
The agency is set to discuss the issue further at a meeting later this spring.