TerrAscend to Enter US Cannabis Market
Written By: Jen Neville
October 9, 2018
TerrAscend Corp.recently announced that the Company intends to explore and pursue growth opportunities in the US, including potential acquisitions of operators in states that have legalized cannabis for therapeutic or adult-use. The Company has identified acquisition prospects with significant market share, strong brand recognition and substantial global potential. TerrAscend's goal is to become the leading multi-state operator in the US cannabis industry while continuing to capitalize on sizable opportunities in Canada and the rest of the world.
To support its new strategy, the Company has entered into an agreement with Canopy Growth Corporation, Canopy Rivers Corporation and entities controlled by Jason Wild, Chairman of JW Asset Management, to reorganize the capital of the company and obtain waivers of certain contractual covenants currently restricting TerrAscend from operating in the United States.
"We see a tremendous opportunity for TerrAscend shareholders to benefit from an early-mover strategy as we grow our business organically and through disciplined acquisitions in those states and countries that have legalized cannabis," stated Michael Nashat, President and Chief Executive Officer of TerrAscend. "Thanks to the ongoing collective support from Canopy Growth, Canopy Rivers and JW Asset Management, our proposed capital reorganization will position TerrAscend to pursue value-generating growth on a global scale."
Bruce Linton, Chairman and Co-Chief Executive Officer of Canopy Growth and Chairman and acting Chief Executive Officer of Canopy Rivers Inc. commented, "We first partnered with JW Asset Management to invest in TerrAscend because of our confidence in Jason Wild's ability to build a business with strong leadership and a responsible approach to growth. We are pleased with what TerrAscend has accomplished in the Canadian market to date and are confident they can continue to build on that success globally."
We are supportive of this reorganization as it positions the Canopy portfolio of companies with conditional future exposure, that is compliant with the policies of our stock exchanges, to a team with a track record of success as they embark to compete in what is anticipated to be the largest cannabis economy in the world. We are thrilled to remain affiliated and aligned with the TerrAscend team as the Company continues to build value for all shareholders, continued Linton.
Details of the Reorganization
The Reorganization would be implemented by way of a statutory plan of arrangement under the terms set out in the Arrangement Agreement. It would be subject to Court approval and the approval of TerrAscend's shareholders, as well as other customary conditions.
As part of the Reorganization:
– to satisfy stock exchange regulation applicable to Canopy Growth and Canopy Rivers that restrict their ability to have an investment in an entity with cannabis operations in the US, each of Canopy Growth and Canopy Rivers will (A) exchange their existing warrants to acquire TerrAscend common shares for Common Shares with a value equal to the difference between the five day volume weighted average trading price of the Common Shares as of October 5, 2018, and the warrant exercise price and (B) exchange all of their Common Shares for a new class of unlisted shares exchangeable into Common Shares that will be non-voting and non-participating and will not be exchanged into Common Shares until (i) the applicable Cannabis Investment Restrictions are lifted or cannabis becomes legal under US federal law and (ii) any necessary stock exchange approvals are received, at which point the Exchangeable Shares will become convertible into Common Shares on a one-for-one basis;
– to assist the Company in complying with certain securities regulations in the US, JW Asset Management will exchange their Common Shares for a new class of unlisted proportionate voting shares on the basis of one Proportionate Voting Share for each 1,000 Common Shares held, which Proportionate Voting Shares will carry 1,000 votes per share, be entitled to participate in dividends and in the distribution of proceeds on a wind-up of the Company on a $1,000-to-$1.00 basis relative to the Common Shares and be exchangeable into Common Shares on a basis of 1,000 Common Shares per Proportionate Voting Share;
– the outstanding warrants to acquire Common Shares held by JW Asset Management will be amended such that they will each become exercisable for 0.001 of a Proportionate Voting Share instead of one Common Share; and
– Canopy Growth, Canopy Rivers and JW Asset Management will waive the US Business Restrictions.
Following completion of the Reorganization, it is expected that:
(i) Canopy Growth and Canopy Rivers will hold the same number of Exchangeable Shares as they each held in Common Shares prior to completion of the Reorganization, plus a number of Exchangeable Shares equal to the number of Common Shares received on the Cashless Warrant Exercise; (ii) JW Asset Management will hold a number of Proportionate Voting Shares equal to one one-thousandth of the number of Common Shares held immediately prior to completion of the Reorganization, with such Proportionate Voting Shares having the same aggregate voting and economic rights as the Common Shares previously held by JW Asset Management, as well as warrants to acquire one one-thousandth of the number of Proportionate Voting Shares as JW Asset Management had warrants to acquire Common Shares prior to completion of the Reorganization; and (iii) holders of Common Shares immediately prior to completion of the Reorganization other than Canopy Growth, Canopy Rivers and JW Asset Management will continue to hold the same number of shares, with the same voting and economic rights, as prior to the Reorganization.
The Cashless Warrant Exercise described above will be effected based on an exchange ratio of 0.8548 of a common share per warrant, based on the five-day volume weighted average trading price of the Common Shares of $7.5778 prior to the date hereof and an exercise price for the warrants of $1.10. Canopy Growth and Canopy Rivers each currently hold 9,545,456 warrants. If they both continue to hold all of such warrants immediately prior to the completion of the Reorganization, they will each receive 8,159,456 Common Shares pursuant to the Cashless Warrant Exercise. Assuming that as of the completion of the Reorganization Canopy Growth and Canopy Rivers each continue to hold the 11,285,456 Common Shares that they currently hold, Canopy Growth and Canopy Rivers will each hold a total of 19,444,912 Common Shares following the Cashless Warrant Exercise. In a subsequent step in the Reorganization, all of the Common Shares held by Canopy Growth and Canopy Rivers will be exchanged for Exchangeable Shares.
TerrAscend expects to hold a meeting of shareholders to consider a special resolution approving the Reorganization in November 2018. Approval would be required from at least (i) 66⅔% of the votes cast by holders of Common Shares present in person or by proxy at the shareholder meeting; and (ii) a majority of the votes cast by holders of Common Shares present in person or by proxy at the shareholder meeting, excluding Canopy Growth, Canopy Rivers and JW Asset Management.
Blair Franklin Capital Partners, independent financial advisors to the unconflicted members of the Company's board of directors, had provided a fairness opinion that the Reorganization is fair, from a financial point of view, to the Company's shareholders (other than Canopy Growth, Canopy Rivers and JW Asset Management). After consultation with financial and legal advisors, the Reorganization had been unanimously approved by the Company's board of directors (with conflicted directors abstaining).
Pursuant to the terms of the Arrangement Agreement, Canopy Growth, Canopy Rivers and JW Asset Management have committed to vote all Common Shares held by them, being approximately 60% of the issued and outstanding Common Shares, in favor of the resolution approving the Reorganization. Additional shareholders, including all of the directors and officers of TerrAscend, representing 16% of the issued and outstanding Common Shares have also entered into voting support agreements in connection with the transaction.