On October 25, 2022, Canopy Growth Corporation announced a strategy to accelerate its entry into the US cannabis industry through the creation of a new U.S.-domiciled holding company, Canopy USA, LLC.
In connection with this strategy, Canopy, Canopy USA and Acreage Holdings, Inc. entered into an arrangement agreement pursuant to which, subject to shareholder approval and the terms and conditions of the agreement, Canopy USA will acquire all of the floating shares of Acreage on the basis of 0.45 of a Canopy share in exchange for each floating share held. In addition, it is intended that the existing option to acquire the fixed shares of Acreage on the basis of 0.3048 of a Canopy share per fixed share will be exercised in accordance with the terms of the existing arrangement agreement between Canopy and Acreage dated April 18, 2019, as amended on May 15, 2019, September 23, 2020, and November 17, 2020. Following completion of the two arrangements, Canopy USA will own 100% of Acreage and Canopy USA will not hold any fixed shares or floating shares of Acreage.
Canopy also agreed to issue Canopy shares with a value of $50 million in three tranches to in order to reduce a potential liability of approximately $121 million pursuant to an amended tax receivable agreement and the related tax receivable bonus plans of a subsidiary of Acreage. In addition, a wholly-owned subsidiary of Canopy agreed to acquire an option to purchase the outstanding principal of Acreage’s debt from Acreage’s existing lenders in exchange for an option premium payment of $28.5 million which, if exercised, would be used towards settlement of the outstanding principal of the Acreage debt.
Wana and Jetty Options
In connection with the formation of Canopy USA, Canopy transferred to Canopy USA the option to acquire 100% of the membership interests of Mountain High Products, LLC, Wana Wellness, LLC and The Cima Group, LLC (collectively Wana), a leading cannabis edibles brand in North America and 100% of the shares of Lemurian, Inc. (Jetty), a California-based producer of high-quality cannabis extracts and pioneer of clean vape technology. Canopy USA is expected to exercise the options to acquire Wana and Jetty.
In addition, Canopy transferred to Canopy USA its conditional ownership position, assuming conversion of its exchangeable shares and the exercise of its option but excluding the exercise of its warrants, of approximately 13.7% in TerrAscend Corp., a leading North American cannabis operator with vertically integrated operations.
Canopy USA Structure
Canopy holds non-voting and non-participating shares in the capital of Canopy USA. The non-voting shares do not carry voting rights, rights to receive dividends or other rights upon dissolution of Canopy USA but are convertible into common shares of Canopy USA. Canopy USA has raised funds from a third-party investor and has agreed to issue additional common shares of Canopy USA to the shareholders of Wana. Canopy and Canopy USA have also entered into a protection agreement to provide for certain negative covenants in order to preserve the value of the non-voting shares held by Canopy until such time as Canopy controls Canopy USA. Canopy also has two designees on the four-person board of managers of Canopy USA.
In connection with the formation of Canopy USA, Canopy expects to hold a special meeting of shareholders to consider a special resolution authorizing an amendment to its articles of incorporation to create a new class of non-voting exchangeable shares in the capital of Canopy. The exchangeable shares will not carry voting rights, rights to receive dividends or other rights upon dissolution of Canopy. Constellation Brands, Inc., the largest shareholder of Canopy, entered into a voting support agreement with Canopy pursuant to which they have agreed to vote in favor of the proposal.
Balance Sheet Matters
Canopy also has entered into agreements with certain of its lenders under its term loan credit agreement dated March 18, 2021 pursuant to which Canopy will tender US$187,500,000 of the principal amount outstanding thereunder at a discounted price of US$930 per US$1,000 or US$174,375,000 in the aggregate. The paydown will be made in two equal payments: the first payment on or about November 10, 2022, and the second payment on or about April 17, 2023.
In addition, Canopy also intends, following the creation of the exchangeable shares, to negotiate an exchange agreement with Constellation to purchase for cancellation up to CAD$100 million principal amount of senior notes due July 2023 in exchange for exchangeable shares, subject to the rules and policies of the Nasdaq and the Toronto Stock Exchange.
In connection with these proposed transactions, Constellation has expressed its current intention to convert all of its shares into exchangeable shares. If Constellation elects to convert its shares into exchangeable shares, Constellation will surrender for cancellation for no consideration all of its warrants to purchase shares and all commercial arrangements between Canopy and Constellation, including the investor rights agreement, will be terminated.
In the event that Constellation does not convert its shares into exchangeable shares, Canopy USA will not be permitted to exercise the rights to acquire Acreage, Wana or Jetty and the new arrangement agreement between Canopy, Canopy USA and Acreage will be terminated. In addition, Canopy USA will exercise its repurchase rights to acquire the interests in Canopy USA held by the third party investors.
Cassels represented Canopy on this transformative transaction.