This article was originally published in National Insolvency Review.
Introduction
On
By establishing an insolvency and regulatory practice allowing for such going concern asset sales, the JWC-Trichome transaction addresses a gap in the Cannabis Act2 and its regulations and contributes to the development of a more mature financial and legal framework for cannabis businesses and their lenders, ultimately facilitating the orderly development of the legal cannabis industry.
Unique challenges
The cannabis industry operates in a challenging regulatory environment. Distressed cannabis businesses and their creditors must contend with the Cannabis Act, which does not contemplate procedures for secured creditors or others—in an insolvency context or otherwise—to take possession of a debtor's regulated cannabis assets. Contrast this to other regulated industries such as telecommunications, alcohol, oil and gas and pharmaceuticals where such mechanisms exist. In this regard, there is a legislative gap in the Cannabis Act.
This challenge stems from the requirement that cannabis businesses obtain and maintain a valid licence (or licences) from
First, as a precondition to obtaining a
Second, the Cannabis Act does not contemplate or permit the transfer or assignment of
The JWC-Trichome transaction
The company
JWC was a publicly-listed, vertically-integrated cannabis company which specialized in growing, cultivating and marketing premium aeroponically-grown cannabis to both medical and recreational markets in
As a result of its negative cash flow and significant capital expenditures relating to an expansion of its production facilities, JWC foresaw that it would shortly become unable to meet its liabilities as they became due. Accordingly, JWC and Trichome entered into discussions to implement a consensual restructuring under the CCAA that would inject liquidity into JWC's operations, smooth its troubled balance sheet and allow its business to emerge as a going concern.
The CCAA proceedings
Following its application to the Commercial List (the Court), JWC obtained a CCAA initial order on
Trichome entered into a stalking horse agreement with JWC (the Stalking Horse Agreement), which provided, among other things, for: a) the purchase and sale to Trichome of substantially all of JWC's assets; including its existing cannabis inventory and the premises used to cultivate cannabis (i.e., the sale of JWC's business as a going concern); and b) the establishment of a sale and investment solicitation process (the SISP) for JWC's assets. The Court approved both the Stalking Horse Agreement and the SISP by way of an order entered
Over the course of the 45-day SISP, 26 interested parties executed confidentiality agreements with JWC and numerous of those parties conducted extensive due diligence on its business and assets. At the conclusion of the SISP, the Stalking Horse Agreement was declared the winning bid, Trichome was declared the successful bidder and the parties obtained an approval and vesting order from the Court on
The Stalking Horse Agreement
The purchase price paid by Trichome for JWC's assets was an estimated
Among the assets purchased by Trichome under the Stalking Horse Agreement were: 1) JWC's cannabis production facilities—being two facilities located in
The licensing process
Closing was conditional upon Trichome obtaining the replacement
First, Trichome's purchaser designee could not obtain its licences until its proposed directors and officers, and the directors and officers of its parent corporation, obtained their security clearances from the RCMP. This process took approximately three and a half months to complete, resulting in a two-month delay to the closing. During this time period, JWC's proceedings under the CCAA continued and Trichome financed JWC's operations under an amended DIP facility.
Second, the Cannabis Act does not provide a mechanism for the transfer of
Health Canada granted to Trichome new licences which became effective onAugust 28, 2020 ;- JWC transferred the regulated cannabis assets to Trichome, under a separate bill of sale from the non-cannabis assets, at
11:59 p.m. onAugust 28 , being the moment before the stroke of midnight; and Health Canada revoked JWC's licences onAugust 29 at12:00 a.m. through a pre-authorized revocation.
As a result of this stroke-of-midnight timing, Trichome obtained ownership of the assets and control of the premises at the precise moment before JWC's licences were revoked; from
Takeaways and recommendations
The JWC-Trichome transaction demonstrates that court-supervised going concern sales of distressed or insolvent cannabis companies are viable means of monetizing and acquiring regulated cannabis assets. By doing so, it contributes to a financial and legal environment which is conducive to the development of the cannabis industry and ultimately furthers
However, regardless of this improved environment, potential suitors and distressed cannabis businesses alike must remain proactive in order to be competitive during future going-concern sales within insolvency proceedings.
Among the factors considered when assessing offers to acquire assets in this context are the anticipated closing timelines and the risks of a derailed closing. Prospective purchasers of cannabis assets who already hold the necessary security clearances gain a competitive advantage, as they can potentially obtain the licence on an expedited basis. There is also certainty that their security clearances will not be rejected. If, on the other hand, a prospective purchaser does not have the necessary clearances, it should determine who will act as the directors and officers of the licensed entity and its parent companies and begin the process of obtaining these clearances as far in advance as possible of any acquisition.
Finally, because the Cannabis Act doesn't codify procedures for secured creditors or others to take possession of regulated assets in the context of an insolvency (or otherwise), collaboration and effective communication with
Footnotes
1. RSC 1985, c C-36.
2. SC 2018, c 16.
3. Cannabis producers must also obtain licenses from the
4. Cannabis Regulations, SOR/2018-144, s 50.
5. See, e.g.,
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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