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In a recent decision, the court detailed how an Ontario cannabis company attempted to restructure and offer settlements in response to class actions against it seeking damages of $500 million. 

Cannabis Company Faces Class Actions

The company is a public company and a licensed producer of cannabis in Canada with facilities in Ontario. 

However, following audits by Health Canada at its facilities in 2019, shipments of all its cannabis products were stopped and its cannabis licenses were partially suspended. 

Additionally, in July 2019, the company publicly announced that it had been growing cannabis in breach of federal law, resulting in an immediate and substantial decline in the price of its shares. 

Shortly thereafter, numerous class actions were commenced against the company in several provinces in Canada and at the federal and state level in the United States, claiming damages in excess of $500 million.

Company Seeks Restructuring to Deal with Legal Issues

Despite extensive efforts to resolve its issues, by March 2020, the company determined it was in its best interest and those of its stakeholders to commence proceedings under the Companies’ Creditors Arrangement Act (the “CCAA”). The CCAA is a federal law allowing insolvent corporations that owe their creditors in excess of $5 million to restructure their business and financial affairs.

Since commencing CCAA proceedings, the company completed each of the business restructuring objectives, including completion of the remainder of its remediation work, reinstatement of its cannabis licenses, resumption of production and processing operations and a return to the recreational and medical cannabis markets.

Company Enters into Mediation for Settlement Of Class Actions

With regard to the class actions suits against it, in 2020, the company obtained a mediation order appointing a judge to conduct a mediation process. 

On January 19, 2021, following extensive negotiations, the company entered into a Restructuring Support Agreement (“RSA”) with the representative plaintiffs in both the Ontario and the U.S. class actions. 

Company’s Restructuring Includes Settlement Offers for Class Actions

The settlement framework set out in the RSA provided for the establishment of a trust for the benefit of the class action claimants. Under the proposed settlement, the company would contribute $50 million, among other legal manoeuvres. Subsequently, additional settlements were reached with co-defendants resulting in the trust receiving an additional $83 million.

Later, the plan was overwhelmingly approved by each class of creditors both by the numbers voting and by the value of their claims.

Company Seeks Court Approval of Plan

As a result, the company went to court to obtain approval of the CCAA plan and to implement the framework for the settlement of the class action claims. 

As explained by the court, the requirements that must be met for court approval of a plan of compromise or arrangement under the CCAA are: 

1) There must be strict compliance with all statutory requirements; 

2) All material filed and procedures carried out must be examined to determine if anything has been done or purported to have been done which is not authorized by the CCAA and prior orders of the court in the CCAA proceedings; and 

3) The plan must be fair and reasonable.

Court Refuses to Approve Plan

Ultimately, the court refused to approve the plan. Specifically, it took issue with one provision in the Plan, which provided for the bar orders required by the SRA. The court explained:

“[W]hile there is evidence of the importance of the assignment to the settlement between the [company] and the [class action] Claimants, there is no evidence of the importance of the [class action] Claimants being able to maintain their claims against the non-settling defendants and recover 100% of the damages while barring the non-settling defendants right to contribution and indemnity.”

As a result, the court refused to approve the plan, finding that its wording was not fair and reasonable in the circumstances. 

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Running a business involves an infinite number of both daily and long-term decisions, all of which will impact your venture. Choosing the appropriate legal structure will influence your success as it will affect your business from start-up options and share capital, to providing for future investment and profit-sharing. The way in which a business is structured will also have a significant effect on risk and liability.

Deciding how to structure your business is a task best undertaken with the guidance of an experienced corporate lawyer with noteworthy experience advising business owners on risk and liability.  At Bader Law, our business services lawyers have been advising clients who are looking to make the best choices about how to organize their business venture for several years.  We work hard to protect your financial and legal interests while ensuring your company operates successfully.

The business services our team offers include experience advising and assisting cannabis start-ups with business structure and licensing matters.

The business law team at Bader Law has decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it as a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. Contact us online or at (289) 652-9092.