Lexpert magazine features articles and columns on developments in legal practice management, deals and lawsuits of interest in Canada, the law and business issues of interest to legal professionals and businesses that purchase legal services.
Issue link: https://digital.carswellmedia.com/i/1181164
LEXPERT MAGAZINE | OCTOBER 2019 5 contingent interest in the largest regulated cannabis market in the world. During the many months leading up to announce- ment, we contemplated several structural variations, many of which we anticipate will be used in future applications. In par- ticular, we believe this transaction struc- ture presents an attractive alternative for global alcohol, tobacco, CPG and pharma- ceutical companies that cannot invest in a US cannabis company today due to stock exchange policies, banking covenants or other regulatory, contractual and legal con- cerns but are still looking for exposure to the US cannabis market. SHAER: Canopy Growth has always been the first mover in the cannabis industry. While the true value of the transaction may not be properly reflected in the share price of Acreage today, we know that our competitors listed on the TSX, NYSE and NASDAQ are considering similar trans- actions in order to capitalize on the US market, where Acreage Holdings has its portfolio of cannabis operations. In addi- tion to current competitors, alcohol, to- bacco, consumer packaged goods and phar- maceutical companies are concerned about losing revenue to the emerging global can- nabis market, and this structure can offer these companies an avenue to participate in the cannabis industry before they may have otherwise done so. DOHERTY: is deal provides a road- map for a suitor interested in locking-up a legalized US cannabis industry participant where prevailing circumstances prevent im- mediate acquisition. Similar transactions have not been con- summated since our deal. is is probably due to the unique attributes of the parties and specific circumstances that enabled this particular deal to materialize. You had the leading global cannabis company, sup- ported by a dominant global beverage com- pany, with a risk profile and the financial wherewithal to structure an attractive offer. Subsequent to the arrangement, scarcity of capital has become a concern for North American cannabis industry participants that make longer-term investments (such as this transaction) difficult to rationalize with near-term capital requirements. Ultimately, this transaction was a meas- ured bet by Canopy on Acreage Holdings' management team's i) influential leadership role in promoting regulatory change towards federal legalization; and (ii) continued exe- cution of its US expansion strategy. LEXPERT: What was Canopy Growth's in- terest in acquiring Acreage Holdings? LITCHEN: Canopy Growth was motiv- ated to find the right partner with which to execute its US strategy. By structuring the transaction with a fixed exchange ratio, Canopy Growth was able to cap dilution for its existing shareholders while providing shareholders of Acreage with exposure to upside in Canopy Growth's share price over the long-term. Aer discussions with vari- ous potential partners, Canopy Growth de- termined that Acreage represented the best acquisition target for a number of reasons. In addition to the conditional access to the US cannabis market, the Acreage trans- action allowed Canopy Growth to license a number of its trademarks in order to build out its brand recognition in the US and de- velop demand and consumer awareness for Canopy Growth products in advance of an- ticipated federal legalization in the US SHAER: Leading up to this transaction we evaluated several US multistate operators, and having considered various factors we determined that Acreage would be the ideal partner for us in the US, allowing us to ef- fectively roll out Canopy's various brands there. Personnel and management were also important to us given the potential length of the interim period before closing. e Acreage board is unrivalled in the cannabis industry or otherwise. Leadership provided by former Prime Minister Brian Mulroney, former Speaker of the US House of Repre- sentatives John Boehner and former Mas- sachusetts Governor Bill Weld gave us the confidence that Acreage would succeed, and inspired the trust needed in an acquisi- tion that may not close for several years. LEXPERT: Was this deal novel, or something that counsel on the deal had seen before? SHAER: Nothing like this has been done before in the cannabis industry. While certain transactions in the pharmaceutical industry are structured to be condition- al on regulatory approval of a drug, this deal structure stemmed from the unique nature of the cannabis industry and neces- sitated a significant initial cash payment to shareholders in exchange for a future acquisition right, owing to the inability of Canopy Growth to close the deal prior to federal legalization in the US So while the groundwork for this acquisition had been established through prior non-controlling interests of US businesses, a deal like this was certainly never contemplated before we got to work on it. DOHERTY: is was a novel transaction structure for which no precedent existed that we were aware of. Cassels Brock, Can- opy Growth and Constellation Brands clearly spent a substantial amount of time and effort to formulate the proposed trans- action structure and ensure that, from a US cannabis regulatory perspective, it was ac- ceptable to Canopy Growth's and Constel- lation Brands' stakeholders (stock exchan- ges, lenders, etc.). Tailoring the proposed structure to Acreage Holdings' particular fact pattern involved some unforeseen issues that required navigation. Another challenging aspect was distilling a complex transaction into a narrative that could easily be explained to Acreage Holdings share- holders and the market generally. LITCHEN: e deal was the natural evolu- tion of a structure that we developed for Canopy Growth in connection with two prior transactions in order to gain exposure to the US cannabis market while comply- ing with stock exchange requirements. In late 2017, we structured the issuance of a warrant from a company with US cannabis operations that was only exercisable follow- ing changes in US law and the approval of the TSX. In the summer of 2018, we ad- vised Canopy Growth on a restructuring of its equity holdings in order to divest of its voting and participation rights until the law changed while permitting the invest- ee to expand its operations to the US e Acreage transaction was the next phase of Canopy Growth's US strategy. LEXPERT: And from the Acreage Holdings side, what made this deal attractive?