It was the first unsolicited takeover bid in Canada’s red-hot cannabis industry, and what an interesting and complicated transaction it turned out to be.
When Aurora Cannabis Inc., one of Canada’s largest and fastest-growing cannabis companies, submitted a proposal to acquire all the common shares of CanniMed Therapeutics Inc. in mid-November 2017, it triggered a nasty battle between the two publicly traded medical marijuana producers that would not be resolved until the end of February 2018.
During the months in between, CanniMed attempted to thwart the hostile bid by rallying its board of directors to support its in-progress acquisition of another, but smaller, marijuana company, Newstrike Resources Ltd., a transaction enthusiastically endorsed by one of Newstrike’s shareholders — iconic band The Tragically Hip.
This counter-development was problematic, however, because four large CanniMed shareholders, who together controlled 38 per cent of its outstanding shares, had originally approached Aurora about acquiring CanniMed in the first place. “When you have a good solid base like that, you’re hoping this could be a friendly transaction,” says Jillian Swainson, Aurora’s Senior Vice President and General Counsel, who had been working on behalf of Aurora in the Edmonton office of Brownlee LLP when the takeover was first proposed.
It proved to be anything but amicable.
The transaction, which at the time was the largest in cannabis history, was marked by accusations of insider bidding, a $725-million lawsuit alleging “multiple claims of wrongdoing” by Aurora towards CanniMed and simultaneous hearings before the Ontario Securities Commission (OSC) and the Financial and Consumer Affairs Authority of Saskatchewan (FCAAS) to consider matters raised by both parties (CanniMed is based in Saskatoon).
The hearings held great interest for more than just the opposing sides. They marked the first time a hostile takeover bid was being brought before regulators following the adoption of a new regime (NI 62-104), published by the Canadian Securities Administrators in February 2016, governing takeover bids in all Canadian jurisdictions. Needless to say, there was considerable interest in what would come out of the hearings at law firms throughout the country.
While the CanniMed deal was bumping along, Aurora was busy on at least two other fronts. One involved the acquisition of a minority interest in Liquor Stores N.A. Ltd., an Alberta company that operates 231 retail liquor stores throughout the province. The other was an announcement that Aurora, which is headquartered in Vancouver and has a 55,000-square-foot growing facility in Cremona, AB, had entered into an agreement to supply medical cannabis products to Shoppers Drug Mart Corporation.
Both those negotiations were child’s play, however, compared to the CanniMed deal. The hostile takeover bid was so unpleasant, says Aurora’s outside counsel, Desmond Balakrishnan, Co-chair of Entertainment, Gaming and Sports in the Vancouver office of McMillan LLP, that Aurora’s CEO, Terry Booth, told him, “If I call and tell you we’re contemplating another hostile takeover bid, come over and kick me in the balls.”
The news of Aurora’s various business initiatives came at a time when Canada, and many Canadian law firms, are gearing up for this fall’s legalization of recreational marijuana, promised by the federal Liberal government. “We were kind of hands-off [towards the cannabis market] until we received a call, maybe in the fall of 2017, from Bank of America,” says Patricia Olasker, a partner at Davies Ward Phillips & Vineberg LLP in Toronto and co-author of her firm’s April 2018 article, “The Cannabis Frenzy.”
The bank needed work on a 9.9 per cent investment transaction that Constellation Brands, the US-based beverage giant that makes Corona beer, among other products, was making in Canopy Growth, an Ontario-based cannabis company. “Once we realized our blue-chip clients were getting drawn into this industry, either directly or indirectly, we realized we had to get smart about it.”
Davies Ward’s reaction was hardly uncommon, as countless firms across the nation, from boutiques to the largest national ones, have established cannabis practices. “We now speak quite regularly to our clients about this industry,” says Olasker, “so we stay on top of the four or five major companies in this area.”
Her clients’ interest is no doubt fuelled by predictions that the cannabis industry is going to be a large and lucrative one as soon as legalization occurs. In January 2018, Statistics Canada estimated that Canadians spent $5.7 billion on marijuana in 2017, 90 per cent of it for illegal, non-medical purposes. That number came about a year after major accounting firm Deloitte had estimated the industry could be worth $22.6 billion a year once the drug was decriminalized.
With so much potential on the line, it’s easy to understand what drew Aurora, which is known for its ability to construct growing facilities — in April it announced plans to build a 1.2-million-square-foot greenhouse in Medicine Hat; it had already begun construction of an 800,000-square-foot facility in Edmonton — to seek synergy with CanniMed, renowned for the quality of its medical marijuana.
Aurora’s first offer to CanniMed in mid-November was an all-stock, $582-million deal, comprising 114 million shares of Aurora at $24 a share, 57 per cent higher than its closing price on that day. “We received opinions from two financial advisors that this offer was not a fair consideration,” says Philippe Tardif, a partner in the Toronto office of Borden Ladner Gervais LLP, who represented CanniMed. “They believed the Newstrike deal could build more value for the shareholders.” Consequently, on November 17, CanniMed and Newstrike announced they had executed an arrangement agreement that valued the latter at approximately $197 million.
In response, Aurora asked the OSC and the FCAAS for relief from the 105-day minimum deposit period required under NI 62-104, down to 35 days. “Everything in the cannabis sector moves incredibly fast,” says Swainson. “There’s never any time to lose, so we felt there was a certain degree of urgency to the transaction.” CanniMed opposed the reduction.
CanniMed established a Special Committee of independent directors to advise it on the two potential transactions. It then countered Aurora’s official offer, sent on November 24, by adopting a shareholder rights plan (or “poison pill”), claiming it was “very concerned” that Aurora, by “secretly obtaining” lock-up agreements from four CanniMed shareholders, might be coercing its shareholders “to accept the hostile bid.” Aurora, on the other hand, asked the regulators to strike down what it deemed to be an “oppressive” rights plan.
On December 11, CanniMed’s Special Committee applied to the OSC and FCAAS to have Aurora’s offer determined an “insider bid” on the basis that the locked-up shareholders had acted “jointly and in concert with Aurora.”
It didn’t take long to get a ruling. On December 22, the OSC and the FCAAS issued a joint order cease trading the shareholder rights plan, denying Aurora’s request to reduce the 105-day minimum bid period and rejecting CanniMed’s claim of an insider bid.
“The insider bid was quite novel,” says Donald Belovich, a Toronto partner in the Mergers & Acquisitions Group at Stikeman Elliott LLP and legal counsel to the Special Committee. “You don’t get discovery, which you would in a court. It’s an abridged, expedited process, which in a lot of respects is very good, as you can get quick decisions. The downside is that without all that document discovery and cross-examination, you don’t get all the facts before the decision-makers. I think what [the regulators] said was that there wasn’t enough information. We don’t have proof.”
According to Aurora’s Swainson: “We didn’t do it. Actual facts can be a very strong refutation.”
As for Aurora’s request for a 35-day minimum, Belovich says, “I think the regulators saw that as a bit of a stretch and creative lawyering.”
If the regulators had also examined the machinations of the hostile bid process, what they would have seen was an expensive and all-consuming undertaking for both parties. “If you asked our client, [this experience] was like pushing off a raft onto the River Styx,” says Balakrishnan, who estimates that “about 35 lawyers [who] cannot agree on anything when they are on opposing sides” were working on the deal and the regulatory hearings at any one time. “Our client would describe it as [being] damaging to both brands and costing tens of millions of dollars in terms of advisory fees, legal fees, accounting fees, human capital.”
The undertaking was made more challenging by the realities of the Canadian process. “Every piece of paper had to be translated into French. A bid circular had to be in both languages. We were required to file in every province and you had to do everything within strict timelines,” says Balakrishnan. “Just to manage the process, we had a daily call for three months, including weekends.”
As Aurora and CanniMed fought their way down hell’s waterway, an unsurprising occurrence started to play a role in resolving the conflict. When Aurora had first ventured forward with its intention to acquire CanniMed in mid-November 2017, its stock was trading at $6.22 a share. On November 24, when it officially announced its offer, it had risen slightly, to $7.24. By mid-January, however, it had almost doubled in value, likely because of all the buzz surrounding the potential deal.
That significant increase coincided with the beginnings of talks, on January 18, between Brent Zettl, CEO of CanniMed, and Terry Booth, Aurora’s top guy, to see if they could shift the tone of their discussions from hostile to friendly. “Most hostile bids end up being friendly,” says Olasker. “One reason is that the bidder wants due diligence and you can’t have that if you continue to go hostile.”
Nor can you reap the rewards of a galloping stock price if hostilities can’t be resolved. By January 23, the day before a friendly deal had been ratified by the two CEOs, Aurora’s stock was at a record high of $14.79. The final agreement amounted to almost double the original offer: a $1.1-billion stock-and-cash transaction based on a share price of $43. By the end of February, the deal was finalized when Aurora received a no-action letter from the Competition Bureau. This also meant that the $725-million lawsuit would no longer go ahead.
“It had become fairly clear that the CanniMed shareholders wanted the transaction to proceed,” says Swainson, as to why the deal turned friendly. “But there was a personal side as well. The more time we actually spent together, there was a greater appreciation that there really were opportunities here and that the companies were far better off together. It was one and one equals three.”
Following the OSC/FCAAS rulings, legal firms took note of what the commissions were saying. BLG’s Tardif co-authored an article for his firm, “Securities Commissions Provide Guidance on New Takeover Bid Regime,” which was a typical example.
“In Aurora Cannabis Inc. (Re), 2018 ONSEC 10, [the regulators] recently, and for the first time, provided guidance on the conduct of hostile takeover bids under the new Canadian regulatory regime,” the authors wrote. “The commissions held that, in essence, the takeover bid regime is a nearly complete code. Notably, the commissions held that: tactical shareholder rights plans will rarely be allowed; the minimum bid period will seldom be abridged beyond the enumerated exceptions; and, the bidder’s ability to purchase up to 5 per cent of shares of the target on the open market will rarely be negated.”
Elaborating on the poison pill ruling, Tardif and his fellow authors noted that, “The commissions stated that a plan that simply reiterates the requirements of the current takeover bid regime would serve no purpose and potentially confuse investors whereas given the protections of the new takeover bid regime, there rarely would be a need to provide for any further protections.” In other words, the status quo was vigorously upheld.
The Aurora-CanniMed transaction “was basically a test case for the new takeover rules,” says Swainson. “It was actually quite exciting being part of that.” But while the end result was a welcome and exhilarating relief, it was by no means the end of Aurora’s undertakings in the cannabis sector. Several other key deals were also at play.
In early February 2018, Aurora announced another transaction, much smaller than the CanniMed deal and far easier to complete. It acquired an approximate 19.9 per cent ownership stake in Liquor Stores N.A. Ltd., for $103.5 million. An additional investment could bring Aurora’s interest in Liquor Stores up to 40 per cent (in May, Aurora did acquire additional shares, bringing its total up to approximately 25 per cent). The deal was definitely friendly, says Balakrishnan. “From a legal perspective, this transaction was the complete opposite of CanniMed. It was simply a purchase of shares.”
Liquor Stores, says Swainson was “a natural” fit for Aurora because of its experience in retail alcohol and its more than 200 retail outlets, some of which it plans to convert to cannabis outlets once the drug is legalized. “We wanted to have responsible distributors, especially in Alberta and BC, which are going to the private retail model.” Testament to its stability and reputation can be seen in its board of directors, which is chaired by Derek Burney, a former Canadian ambassador to the United States and a key political strategist to Prime Minister Brian Mulroney.
Liquor Stores, Swainson adds, “is the largest private liquor retailer in Canada. They’re very good at retail and they create a very good customer experience. We have the knowledge of cannabis and what the cannabis consumer wants, so that’s part of what Aurora brings to this partnership.” To further affirm its commitment to the retail cannabis sector, in May, Liquor Stores changed its name to Alcanna Inc., a portmanteau of alcohol and cannabis.
Olasker thinks the transaction was a strong move for Aurora. “It’s very far-sighted for them to have done that,” she says. “It will be an incredible distribution channel for the recreational area. All the pre-existing infrastructure is in place. There’s nothing to build. Nothing to staff. Just empty shelves. I thought it was genius.”
In late February 2018, Aurora made yet another strategic move when it signed a deal to supply Aurora-branded medical marijuana products to Shoppers Drug Mart, Canada’s largest pharmacy retailer. It’s expected the products will be sold online, as Canadian regulations currently restrict the sale of medical cannabis in retail pharmacies. Because the deal is subject to Health Canada’s approval of Shoppers Drug Mart’s application to be a licensed producer, Aurora says it can’t comment on any aspects of the deal at this time other than that under the terms of the agreement the company will supply Shoppers Drug Mart (“Shoppers”) with Aurora-branded medical cannabis products.
“I don’t think any of the Canadian companies that have entered into similar agreements with Shoppers are prepared to talk right now,” says Swainson. She anticipates that the legislation preventing pharmacies from distributing medical marijuana will eventually change. Of note, Shoppers’ parent company, Loblaw Companies Ltd., applied for a licence to dispense medical marijuana in 2016.
But the company the Financial Post described as, “the hungriest M&A player in the Canadian marijuana space,” had not finished its shopping spree. In the middle of May, Aurora announced an even bigger deal than the one involving CanniMed.
In this instance, Aurora announced plans to acquire rival MedReleaf Corp. for an estimated $3.2 billion, all in stock, making it the largest cannabis transaction in Canadian history. “The deal, which is expected to close in August, will unite the second- and fourth-largest Canadian marijuana companies by market capitalization, creating a potential rival to industry leader Canopy Growth Corp. in terms of geographic reach, product offerings and production capacity,” the Financial Post reported. “The combined market cap of both companies stood at $7.02 billion [on May 14], compared to Canopy’s $6.45 billion … MedReleaf shareholders will receive 3.575 Aurora shares for each MedReleaf share they own. That implies a price of $29.44, and a premium for MedReleaf shareholders of around 34 per cent, based on the 20-day weighted average for both companies’ shares. After the deal closes, MedReleaf shareholders will control roughly 39 per cent of the combined company.”
Described as a friendly transaction — likely a great relief for Aurora after the CanniMed hostilities — it is almost certain to be approved by MedReleaf’s shareholders. The vote will require two-thirds approval, but with shareholders controlling 56 per cent of the shares having signed lock-up agreements, it seems the deal will get done.
Details of how the transaction came about were not available at the time of writing. Swainson, however, told Lexpert that the acquisition is part of Aurora’s strategy “to build a fully integrated global Canadian leader [in the cannabis sector] through both organic growth and selective M&A. This deal speaks to the business development initiative we’ve undertaken to allow us to participate in every segment of the business, both domestically and internationally.”
As Aurora and other Canadian cannabis companies continue to manoeuvre and expand, the industry they are gambling on is anything but a sure thing, however, according to some analysts.
In a story on CBC’s website entitled, “Canadian pot companies are worth billions — but is it a bubble ready to burst?” it added that “there are risks on the horizon.”
The article quotes Chris Damas, editor of investment newsletter The BCMI Cannabis Report, as saying: “Everyone compares this to the dot-com era. You could throw a dart and hit a winner in cannabis.”
If the future of the cannabis industry is still uncertain, one reality seems hard to refute: the legal industry is going to benefit greatly from it in the years ahead. That is underlined by the fact that there are “84 public companies trading on Canadian stock exchanges that are somehow connected to the cannabis industry, and collectively they are worth $37 billion,” according to Bloomberg data analyzed by cbc.ca.
“Lawyers are going to have a lot more work from the cannabis industry,” says Swainson, “because what we’re doing here is inventing a brand-new industry, not just in Canada but globally. That’s very exciting and by its very nature it implies there will be a ton of new legal work to do and it will require people who have a knowledge and understanding of the emerging sector. We believe there will be a scramble for talent and a scramble for a law firm to get up to speed on what is different and what is special about this industry. There’s no template or blueprint for this industry and that applies in the most part to the legal side.”
Coming from a company as aggressive and ambitious as Aurora, it sounds like an invitation to help stir the pot even more.
Desmond Balakrishnan,Patricia L. Olasker,Philippe Tardif,Donald G. Belovich,Jillian L. Swainson
McMillan LLP,Davies Ward Phillips & Vineberg LLP,Borden Ladner Gervais LLP,Stikeman Elliott LLP
Mergers & Acquisitions