CANNABIS MANAGEMENT & SERVICES AGREEMENTS
Cannabis management agreements and professional services contracts create relationships that the DCC treats with heightened scrutiny — because a third party with significant control over a licensed cannabis business may qualify as an undisclosed owner subject to the agency’s background check, financial disclosure, and licensing requirements. Under B&P §26001 and DCC regulations, an individual or entity with the right to receive a percentage of gross or net revenue, or who exercises operational control, may constitute an “owner” for licensing purposes regardless of whether they appear on the license as such. The Law Office of Shay Aaron Gilmore drafts, reviews, and negotiates cannabis management agreements, consulting contracts, services agreements, and operating agreements that reflect DCC ownership disclosure obligations, labor peace agreement requirements, and the operational realities of California’s licensed cannabis market.
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The DCC Ownership Trap in Management and Services Agreements
The most significant risk in a cannabis management or services agreement is not the commercial terms — it is the risk of creating an undisclosed DCC owner. California’s cannabis licensing framework defines “owner” broadly under B&P §26001(al) to include any individual or entity that: (a) holds more than 20% of the equity interests in the licensee; (b) receives a share of gross or net revenues; (c) exercises operational control, including the authority to hire and fire personnel, set prices, or control significant business decisions; or (d) is identified as an owner under the DCC’s own investigation of the licensee’s organizational documents and financial arrangements.
A management agreement that grants the manager authority to hire and fire, set product pricing, or control distribution relationships — paired with a management fee structured as a percentage of revenue — checks multiple DCC ownership criteria. If that manager has not been disclosed to the DCC and undergone a background check, the licensee faces disciplinary action for operating with undisclosed owners, which can result in license suspension or revocation under B&P §26030. The manager faces potential criminal exposure for participating in an unlicensed cannabis operation.
The drafting solution is to structure management and services agreements in a way that clearly delineates between operational consulting (advisory authority only, flat-fee compensation) and actual management control (operational authority, revenue-share compensation — which triggers disclosure obligations). Where revenue-share compensation is commercially necessary, the agreement should be paired with disclosure of the management company to the DCC as a financial interest holder, with appropriate background clearance obtained before the agreement takes effect. The Law Office of Shay Aaron Gilmore advises on the structure and disclosure obligations for cannabis management agreements before they are executed.
Operating Agreements, LLC Governance, and Professional Services Contracts
California cannabis licensees organized as LLCs are required to have operating agreements that address management authority, capital contributions, profit distributions, and transfer restrictions — all of which interact with DCC licensing requirements in ways that generic LLC operating agreement templates do not contemplate. Under DCC regulations, any change in ownership (including transfers of more than 5% of the equity in a licensed LLC) requires prior DCC approval under the ownership change process, and a transfer made without DCC approval constitutes a license violation. An operating agreement that permits free transfer of membership interests — or that fails to include a DCC-compliant transfer approval mechanism — creates a regulatory trap for every subsequent capital raise or ownership change.
Professional services contracts for cannabis businesses present a different set of compliance issues. Accounting, marketing, technology, and security services are frequently contracted out by cannabis operators, and these contracts must be structured to avoid inadvertently creating a financial interest in the licensee — for example, through equity compensation, profit-sharing bonuses, or revenue-based service fees — that would require DCC disclosure. Cannabis professional services contracts should use flat-fee or time-based compensation, include an express representation that the service provider has no financial interest in the licensee beyond the stated fee, and include a DCC cooperation clause requiring the service provider to provide documentation in the event of a DCC investigation or audit.
Labor peace agreements create a parallel compliance overlay for management contracts in larger cannabis operations. Under B&P §26051.5, a licensee with 10 or more employees must maintain a labor peace agreement with a bona fide labor organization. A management company that employs workers at a licensed cannabis facility — or that makes employment decisions that effectively control the licensee’s workforce — may need to be a party to the LPA or may trigger the LPA requirement independently. Cannabis management agreements should address the LPA obligation directly, specifying which entity (licensee or management company) is responsible for maintaining compliance with the labor peace requirement.
Cannabis vs. Hemp — Management & Services Agreement Differences
| Issue | Cannabis Management & Services | Hemp Management & Services |
|---|---|---|
| Ownership disclosure risk | High — DCC ownership definitions are broad; revenue-share or operational control may create undisclosed owner | Low — no state licensing equivalent; no background check requirement for hemp management contractors |
| Labor peace agreement | Required for licensees with 10+ employees (B&P §26051.5); management company employment relationships may trigger LPA | Not applicable — no LPA requirement for hemp operations |
| Operating agreement transfer restrictions | DCC approval required for any transfer of >5% LLC equity; operating agreements must include compliant transfer mechanism | No state approval required for hemp business ownership transfers |
| Revenue-share management fees | Creates financial interest requiring DCC disclosure; must be structured carefully | Permitted without state disclosure; standard commercial arrangement |
| Background check requirements | DCC background check required for all owners, including individuals with operational control or revenue interest | No state background check requirement for hemp management contracts |
| Federal enforceability | State courts only under Civil Code §1550.5; federal illegality defense applies | State and federal courts; federal forum available; arbitration fully enforceable |
Representative Matters
- Drafted and negotiated a management agreement for an investor group acquiring operational control of a licensed cannabis dispensary, structuring the management fee as a flat advisory fee (not revenue-share) to avoid creating a DCC-disclosable financial interest, and advising on the required DCC ownership disclosure for equity holders above the 20% threshold.
- Drafted an LLC operating agreement for a licensed cannabis cultivator with investor participation, including DCC-compliant equity transfer restrictions, a management authority structure distinguishing between operational decisions and advisory authority, and a labor peace agreement compliance allocation between the managing member and investor members.
- Advised a South Bay cannabis retailer on restructuring a consulting arrangement with a former operator that had been structured as a revenue-share agreement, transitioning the arrangement to a flat-fee consulting contract and advising on DCC disclosure requirements for the prior arrangement.