Pennsylvania liquor license may only be used by the owner of that license, the “licensee.” The licensee may not lease the license or allow an individual that is not recognized by the Liquor Control Board (LCB) as the owner to use that license. However, the LCB does allow “management companies” to manage a licensed facility. Essentially, the licensee hires the management company as an agent to operate the facility. Licensees who wish to utilize a management company must provide a completed application to the LCB, the pertinent fee, and a copy of the management contract for the LCB’s review, within thirty (30) days of entering into the agreement. The LCB then will notify the licensee, in writing, whether the management agreement application has been accepted or refused. The management company must be registered to do business in Pennsylvania and must receive tax clearance from the Pennsylvania Department of Revenue and Labor and Industry before the LCB will approve any management agreement.
The most common use of the management company is when a license is being transferred to a new owner. Usually when the transfer is “person-to-person” and the location remains the same, the new owner wants to try out the business before actually opening with a license in its own name. A typical license transfer can take six weeks or more to complete. Additionally, the purchaser of a licensed establishment often wishes to begin operating immediately, to mitigate any lost revenue that would occur if the business shut down during the pendency of the transfer. That transition is a good time for the buyer to learn and understand the business and its customers.
The licensed establishment must remain under the control of the licensee at all times. A management agreement does not permit the licensee to simply turn the business over to the buyer. The manager that is recognized by the LCB for a specific location of a licensed premises is permitted to serve as the agent for the licensee and is responsible for the oversight of any management company.
The LCB has traditionally permitted management companies to operate licensed premises on behalf of licensees, provided that the management companies do not have a “pecuniary interest” in the license. The LCB defines “pecuniary interest” as: “An interest that sounds in the attributes of proprietorship.” There is a rebuttable presumption of a pecuniary interest when a person receives 10% or more of the proceeds of the licensed business or when control is exercised by one or more of the following methods: employing a majority of the employees of the licensee; independently making day-to-day decisions about the operation of the business; and having final authority to decide how the licensed business is conducted. A management company is not allowed to exercise control of the operation of the licensed premises, via the management agreement. The LCB has consistently held that a licensee must be free to veto any decisions made and/or acts performed by a management company without condition in order for a management contract to be acceptable; otherwise, the licensee does not possess ultimate authority over the operation of the licensed business. A licensee may not transfer shares of its corporation to a management company as that would give the management company some control over the licensed establishment.
The management agreement is a good instrument for shifting some responsibilities of operating a licensed establishment without relinquishing ownership of the liquor license. Obviously any licensee desiring to enter into a management agreement should consult an attorney to navigate the complexities of the Liquor Code and regulations relating to management agreements.
– J. Ken Butera