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Beware Pitfalls And Perils For The Uninformed

By Peter A. Berdon, Esq. as seen on thebeveragejournal.com.

Posted on June 3, 2015

After my April article concerning the sale of one’s business, I received an email from an old friend and colleague, Attorney Jan Trendowski, reminding me of some of traps for the unwary of liquor license compliance that are often neglected or even more likely simply over looked.

Changes of Ownership

First and foremost among these is a change of the ownership of any backer of a liquor license requires prior approval by the Department of Consumer Protection. This rule applies to all business entities – that is corporations, limited liability companies, partnership, etc., and exempts only those entities which are publicly held and traded on an exchange. The rule which is unambiguous is set forth in Section 30-6-A4(a) of the regulations and states in part: “No transfer by sale or otherwise of any of the shares of stock of the backer corporation, or the corporation which has a financial interest in the backer, may be made or any additional shares of stock issued without notice to and approval by the department except a corporation whose stock is publicly held and sold on a bona fide stock exchange.”

Violations of this provision happen, often unwittingly, in one of several ways. First, the uninformed practitioner, often an attorney or accountant, unfamiliar with the restrictions of transfer may simply make the transfer upon the instructions of the client. These transfers may be the result of the admission of new principals to raise capital or be the result of bringing in a new operating partner. Death and the subsequent distribution of the decedent’s estate will similarly trigger the application of this rule. More likely than not, the transfer is completed without question and can go unreported to the Department for years. Even the reallocation of ownership interests among a group of existing owners, perhaps as a result of a capital call, will run afoul of this provision.

Even more difficult for a liquor license owner to monitor are complex privately held business which are comprised of multiple layers of entities, some of which may be mere “investors” in the operating entity. Even transfers at remote levels of ownership require prior approval of the Department of Consumer Protection. To help ensure compliance it is imperative that the liquor license owner require, through enforceable written agreements, that its members or owner not transfer any ownership interests without first obtaining the approval of the Department of Consumer Protection.

Changes of Officers and Directors

Similarly, the Connecticut regulations require that any change in the officers, directors or board of trustees of a liquor permit owner be reported to the Department of Consumer Protection. Unlike a transfer of ownership prior approval by the department is not required, but a notice of the change must be forwarded to the department within thirty days from the date of change. It is important to note that this disclosure requirement is not limited to non-public companies, but included publically held and traded companies as well.

Change of Permittee

Lastly, properly changing permittees is often over looked. When a permitee has been terminated from employment by the permit owner, the permit owner must designate a substitute permittee within 48 hours and notify the Department of Consumer Protection that the substitution has been made. Within sixty days from the removal of the permittee the liquor permit owner must file with the Department an application for permanent substitution for the designated substitute permittee.

Oops, I forgot

What should you do if one of these changes was made and you either failed to obtain prior approval or make proper notification? First, don’t panic. While failure to comply with the regulations can subject the permit owner to fines and suspension by the Department of Consumer Protection, it has been my experience that the Department is more concerned with bringing its licensees into compliance than penalizing them of innocent mistakes. Obviously, this statement does not hold true where the failure to file the application or provide the required noticed was done to circumvent the intent and public policy behind the Liquor Control Act. Second, consider consulting a licensed lawyer who practices before the Department. He or she can help provide insight as to how the Department will handle a subsequent disclosure. Third, gather the documents and facts so that you can present a clear and accurate statement of what occurred to the Department. Forth, file the necessary application with the Department and request that the approval relate back to the necessary notification date.