December 12, 2017
By: Andrea Hill
I am pleased to bring you this instalment of my blog, rounding up what’s currently happening in the cannabis industry in Canada and abroad.
“Financial guerrilla tactics” and Pick your poison: Aurora grapples with CanniMed in the public eye
- The board of Cannimed Therapeutics Inc. (TSX: CMED) has formally responded to a takeover bid launched by Aurora Cannabis Inc. (TSX: ACB), under which Aurora is offering $24 worth of Aurora’s shares for each CanniMed share tendered. CanniMed issued a directors’ circular yesterday and pulled no punches in rejecting Aurora’s offer – here’s the eye-catching first page:
- Aurora has set up a website dedicated to its bid, and has invested in its own flashy graphics:
- Aurora’s market capitalization currently hovers around $3 billion, the product of a recent tripling of its stock price after it spent a year hovering around $2.50 per share. Aurora is known for its big, brash projects: for example, its 800,000 square foot “Aurora Sky” greenhouse under construction will, the company says, be the world’s biggest and most advanced.
- CanniMed, which has 17 years of operations as the federal government’s former incumbent medical cannabis producer, has taken a more measured approach to growth and has never had a recall or product shortage. But the fact that CanniMed’s share price has remained around $12 for the past year and has not followed the sharp November spike experienced by Aurora and several other major licensed producers could be a cause of shareholder grumbling.
- Aurora, however, is offering its own shares as consideration for the CanniMed shareholders, meaning that CanniMed shareholders will become Aurora shareholders. In the frothy world of cannabis stocks where companies can gain or lose hundreds of millions of dollars in value in a day, cannabis companies are hard to value and share-for-share deals are tricky to assess.
- Both companies are courting CanniMed’s shareholders. But their open hostility to each other – rare in an industry where 80 LPs share an insatiable consumer market and oceans of investment capital – makes for drama worthy of a legal thriller:
- When Aurora first announced its intention to make a bid, CanniMed was already in the middle of negotiating a deal to acquire Newstrike Resources Ltd. (TSXV: HIP), parent company of licensed producer Up Cannabis Inc., famous for its association with Canadian rock legends The Tragically Hip. The Aurora offer forced CanniMed to disclose the existence of the Newstrike negotiations, perhaps sooner than they would have liked. Aurora made its formal take-over bid subject to the Newstrike transaction not proceeding, and stated that it “will be able to accelerate CanniMed’s growth more effectively than current management”.
- Aurora also announced that it had locked up 38% of CanniMed’s shares, surely a blow to CanniMed to know that their three largest shareholders were speaking with Aurora behind their backs. Aurora has even said that the whole idea for the takeover came from these shareholders looking to find a buyer for CanniMed and choosing Aurora as the best suitor. More recently, CanniMed has alleged that several of its own board members were also quietly taking part in that search.
- CanniMed responded by calling Aurora’s stock price “inflated” and having a “value that does not appear to be based on any substantive decisions or value created by its management”.
- CanniMed then issued an additional press release self-evidently titled “Actions Versus Words: Aurora CEO’s Actions Reveal That Aurora Stock is Inflated; Insiders Sell $17 Million in Stock During Their Hostile Take-over Bid for CanniMed and During a Financing”.
- CanniMed also adopted a poison pill, which is legal parlance for a shareholder rights plan which makes an attempted takeover uneconomical. CanniMed’s plan issues a “right” to each of its shareholders which, if activated, allows the holder to purchase additional shares of CanniMed at a substantial discount – effectively multiplying the acquisition cost for the acquiror. Aurora could activate this right by purchasing any CanniMed shares or by entering into any new lock-up agreements, among other things.
- What this means is that Aurora effectively is not able to take up any CanniMed shares while the poison pill is in place. Unlike the US, however, where target companies can sometimes keep these shareholder rights plans in place indefinitely, Canadian regulators will eventually cease-trade a poison pill and let the shareholders decide whether or not to tender their shares to the offer. The view in Canada is that poison pills can buy a target company more time, but (unlike the response to drugs that we’re taught in grade school), a target cannot “just say no”.
- After the poison pill announcement, Aurora fired back that it was “astonished” by CanniMed’s continued refusal to negotiate, and vowing to challenge the “self-serving,” “oppressive”, and “rash” poison pill. “It looks to us like they’re scrambling,” said an Aurora executive. In a BNN interview, CanniMed’s CEO said that he can’t talk to Aurora because of its exclusivity agreements with Newstrike, called Aurora’s conduct “financial guerrilla tactics”, and accused the major CanniMed shareholders who had approached Aurora of breaching their exclusivity obligations to the company.
- Pulling no punches, CanniMed also asked the Saskatchewan government to block the takeover (perhaps hoping that, as with the 2010 attempted takeover of Potash Corp. by BHP Billiton, the provincial government would intervene). But a government spokesperson shut down the idea, saying that the Ministry of Economy “views this strictly as a commercial transaction, and will not be commenting further.” Aurora crowed that this was “the latest in a series of increasingly desperate schemes by CanniMed.”
- Takeover bid offers must remain open for acceptance for at least 105 days – a period reflecting a recent extension from 35 days which was intended to give offeree boards more time to consider and respond to a bid, including seeking out “white knight” preferred alternative acquirors. Aurora’s offer remains open to acceptance by CanniMed shareholders until midnight on March 9, 2018, but Aurora has applied to the securities regulators to have the poison pill cease-traded and has also asked to reduce the 105-day period to the previous regulatory requirement of 35 days. CanniMed is opposing this.
- Yesterday, CanniMed also asked the securities regulators in Ontario and Saskatchewan to cease trade Aurora’s bid on a number of grounds, the most interesting of which is that the bid is actually an “insider bid” under Canada’s minority shareholder protection rules, Multilateral Instrument 61-101. The argument is that the CanniMed shareholders who entered into the lock-up agreements are “joint actors” with Aurora on the bid. It’s an interesting proposition, especially as Aurora executive vice-president Cam Battley is on the record as saying that those major shareholders approached Aurora.
- If CanniMed is successful, the regulators would tell Aurora to start over with a brand new bid – but this time, an insider bid, which would require additional disclosure including a formal valuation (unless an exemption is available), a 50% minimum tender condition for minority shareholders excluding the locked-up shareholders and other interested persons (a higher tender threshold than Aurora currently needs), and most importantly a reset of the 105-day clock.
- Aurora’s attempt to buy CanniMed comes amid a string of smaller purchases, including Aurora’s acquisition of greenhouse design firm Larssen Ltd., which is in the midst of working on greenhouses for five other licensed producers. Aurora made it clear that the terms of Larssen’s engagement with those other LPs (which remain unidentified, but which probably include The Green Organic Dutchman Ltd. based on a press release issued by one of its shareholders) were likely to change once the buyout is completed: “We’re going to certainly encourage those to proceed but we’re going to require some level of partnership, whether that be an equity stake or a supply agreement or other things”, said Aurora’s executive vice-president Cam Battley.
What’s Up in Weed is not legal or financial advice. It is a blog by SkyLaw which is made available for informational purposes only and should not be used as a substitute for professional advice from a lawyer. This blog is subject to copyright and may not be reproduced without our permission.
If you have any questions or would like further information, please contact us. The SkyLaw team would be delighted to speak with you.
© Copyright SkyLaw 2017. All rights reserved. SkyLaw is a registered trademark of SkyLaw Professional Corporation.
Subscribe to What’s Up in Weed
Click here or enter your email address below to receive our weekly blog by email: