As the cannabis industry matures, the shuffling of corporate directors has received widespread attention, shedding light on how directors are required to work on behalf of their companies and shareholders.
A seat on the Board of Directors of any cannabis company is a coveted role that requires navigating ethical predicaments unique to the cannabis industry. Cannabis companies are often still considered criminal enterprises by the federal government, and even ancillary businesses may be regarded as co-conspirators. What does this mean for directors?
A cannabis business director’s role and responsibilities
The scope of a corporate director’s fiduciary duties varies from state to state. Typically, when courts review decisions by a company’s board, they presume that such decisions are made:
- (a) on an informed basis,
- (b) in good faith, and
- (c) in the best interests of the shareholders.
This doctrine, known as the presumption of regularity, is often applied in tandem with the business judgment rule. Under the business judgment rule, if there is any “rational business purpose” supporting a board’s decision, a court will not substitute its judgment over the board’s. This presumption may be overcome, however, if a plaintiff demonstrates that the board acted disloyally to shareholders, in bad faith, or in clear derogation of due care, such as in breach of fiduciary duty.
Generally, corporate directors owe two primary fiduciary duties both to the company and its shareholders: duty of care and duty of loyalty.
Duty of care
Under the duty of care, each director is charged with the responsibility to make thoughtful, calculated, informed decisions throughout the decision-making process. Proper recordkeeping of the decision-making process — including deliberations, objections and abstentions, and memorializing consents and resolutions — is critical.
Directors may seek the advice of experts and are entitled, as a matter of law, to rely upon information and opinions presented by any other person as to matters reasonably believed to be within such a person's professional competence, when that person has been selected with “reasonable care” on behalf of the company.
When analyzing whether or not a director properly exercised the duty of care, courts will analyze the extent to which the director actually performed due diligence with respect to the proposed action and engaged in the decision-making process. Directors who fail to evaluate and assess information, seek expert advice or request backup evidence with respect to the issues they are considering may run afoul of this duty.
Duty of loyalty
The duty of loyalty requires directors to act in the company’s and its shareholders’ best interests by subordinating any personal interests to the company. Directors who stand on both sides of a prospective transaction, who may receive a benefit distinct from any shareholders’ benefit, or who engage in self-dealing risk violating this duty, as do directors who are beholden to a party similarly “interested” in the transaction.
Some conflicts of interest, depending on applicable law, may be resolved provided that:
- The conflict is fully disclosed to the board and shareholders,
- The decisions made are beneficial to the company and shareholders, independent of any special benefit that may also be conferred upon the director; and
- Procedural safeguards to protect the integrity of deliberations are utilized.
If the business judgment rule is satisfied, directors will not be personally liable for corporate actions, nor will courts invalidate such actions. But if even one of the business judgment rule factors is not satisfied, directors lose the presumption of validity, and courts will review the corporate action under a stricter “entire fairness” standard, to assure that the transaction was conducted at a “fair price” and through “fair dealings.”
Cannabis transactions primarily implicate a subset of the duty of loyalty: the duty of good faith. “Bad faith” conduct might not be disloyal to the company, but nonetheless rises above mere inattention or failure to be informed. Such conduct is undertaken for purposes other than the company’s best interests, in knowing violation of applicable law, or with conscious disregard for one’s duties. That said, as cannabis law evolves, consistent with legalization and shifts in federal enforcement priorities, a “knowing violation” is not always easily ascertainable.
The risks cannabis business directors take on
Corporate directors and officers who intentionally cause a business to openly violate federal law — of which all plant-touching cannabis businesses are — may be necessarily operating in open breach of their fiduciary duties. This risks a director’s personal liability, even when acting in the best interests of their shareholders. It is further questionable whether traditional indemnification and exculpation provisions, which ordinarily may absolve directors from personal liability for breach of fiduciary duty, are sustainable in the cannabis space.
Notable corporate board changes in the cannabis industry
The cannabis industry has witnessed numerous high-profile changes in corporate boards.
- In 2022, Steven Hawkins resigned from the board of directors of the U.S. Cannabis Council. He was replaced by Khadijah Tribble, who was at the time an executive at Curaleaf.
- In October 2024, TILT Holdings, Inc. announced a board reshuffle, with Adam Draizin stepping down and TILT’s first general counsel, Marshall P. Horowitz, joining as a new member.
- In May 2025, CannaPharmaRX, Inc saw a major board reshuffling when LTB Management exercised its right to appoint additional Board members. Constantine Nkafu, the company’s then-interim CEO, and Elliot Zemell, were appointed as new board members.
What should directors do to avoid liability?
To avoid liability for directors, cannabis companies should assure that shareholders are fully apprised of the nature of the business and have the opportunity to acknowledge and appreciate the various risks associated with their investment — particularly regarding gray areas of illegality and the tension between federal and state law — and paper transactions accordingly. In such cases, courts are more likely to view allegedly aggrieved parties to have “assumed the risk” of the transaction at issue and deny relief.
Directors should also consider purchasing Directors and Officers (D&O) insurance to protect themselves against any liabilities. These policies protect a board member’s personal assets and fund costs related to their defense in the event that legal action is taken against the board. Directors should discuss the nature of the company with their prospective insurer prior to purchasing a policy to understand coverage limitations.
The right legal counsel helps directors navigate their obligations
Directors need to keep the legal status of cannabis in mind when serving on a board. They need to ensure they can properly carry out their duties while acknowledging that the business they serve runs afoul of federal law, arguably a contradiction of the duty of good faith directors are expected to uphold. Still, though, it’s possible to serve these boards, and to serve them well.
Whether you’re organizing a Board of Directors for the first time or you’re considering joining a board as a director, seek out counsel from expert and experienced cannabis attorneys. At Rudick Law Group, we know how to work closely with companies and their boards to ensure that all duties are being fulfilled while putting best practices into place to protect officers as they carry out their responsibilities. Schedule a consultation to get started.
A version of this article originally appeared in Marijuana Venture magazine.
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