Cassels successfully responded to a $6.6 million application commenced against Cresco by 180 Smoke and its former principals. The applicants sought $6.6 million in damages representing amounts that they claimed were owing pursuant to a share purchase agreement (“SPA”) upon a change of control where Cresco acquired Origin House (the “Cresco Transaction”).
The court was required to (1) interpret various provisions of the SPA to determine the applicants’ entitlement to unearned milestone payments and (2) to determine whether Origin House breached its obligations under the SPA, including its duty of good faith and honest performance of its contractual obligations and/or its duty of good faith and honesty in the exercise of its discretion under the provisions of the SPA.
The applicants argued that they were prevented from earning the 2019 revenue milestone and a cannabis license milestone due to pre-closing restrictions placed on 180 Smoke by Origin House. They further argued that Origin House repeatedly advised 180 Smoke that the change of control would occur in 2019 and 180 Smoke relied upon that representation when failing to earn the revenue required to earn the 2019 milestone.
The court agreed with Cassels’ interpretation of the SPA – since the Cresco Transaction closed in 2020, the wording of the provision provides that the applicants were not entitled to an unearned revenue milestone payment for 2019. The applicants had to hit the revenue target to earn the milestone.
The court analyzed the Supreme Court of Canada’s trilogy of good faith decisions: Bhasin, Callow, and Wastech, and determined that Origin House did not impose pre-closing restrictions on the applicants arbitrarily or capriciously and the restrictions were objectively reasonable in the context of a change of control transaction.
While the court found that Cresco ought to have informed the applicants in October 2019 that the closing date was delayed to 2020, Cassels successfully argued that no damages flowed from this failure to advise. The court agreed with Cassels’ submissions that there needs to be an evidentiary foundation on which to base such a damages claim (i.e., that there was some credible opportunity that could have resulted in the closing date being changed or that 180 Smoke could have hit the revenue threshold to earn the 2019 Revenue Milestone).
The application hearing was argued virtually by Ted Frankel and Meghan Rourke. Justice Kimmel’s decision can be found at 2022 ONSC 1745. The applicants have appealed the decision.