The Value of Disclosure Requirements

Friends, I’ve had the pleasure of reading through the Offer to Purchase filed by Green Growth Brands earlier this week in GGB’s hostile takeover offer for Aphria (discussed before in my blog!).  I highly recommend that you don’t read it (the Offer, not my blog!) – it’s boring and repetitive and filled with legalese and the font is really small, as these things tend to be.

Now that the hostile is live, GGB’s offer is getting slow response from some investors who talked to Bloomberg (link).  Sensibly, they’re waiting to see if anyone else comes in with a topping bid.  My favorite comment is: “’The better solution would be if Green Growth bumps up a little, like may be [sic] another $1 or so, to make it a friendly deal.’”  In other words, “That’s a nice deal you have there – I’d hate to see it burn to the ground.”  Also, to be persnickety, it’s the target’s board that decides whether a deal is friendly or hostile (in other words, whether the target is going to recommend the shareholders take the offer), not the shareholders themselves.

It’s worth* focusing for a minute on the backstop commitment in this deal.  What’s a backstop commitment?  Well, it’s an agreement from a well-capitalized investor to take up a portion of the offering/investment that isn’t otherwise sold to others.  It helps ensure (hence the word “commitment”) the deal gets done if the fundraising doesn’t go as planned, giving the target comfort about the buyer’s ability to close. 

In this deal, All J’s Greenspace, LLC (which is a fantastic name), GGB’s largest shareholder, is providing that commitment – indeed, they issued a press release today about it (why did an investor issue a press release? because it’s the way the Cannabis public markets work these days). You can read it here: link.  All J’s currently owns about 20% of the regular voting stock and 100% of the proportionate voting shares (which votes 500:1 with the regular common and gets 500x the common dividend)**, and they’re getting paid a fee of 2.5% of the commitment in additional proportionate voting shares (the committing investor never offers up its balance sheet without getting paid).  If the deal closes and All J’s takes up the entire C$150 commitment, All J’s would own 38% of the regular common and 100% of the proportionate voting shares.  If I’ve done my math right***, All J’s would control about 55% of the GGB vote post-deal – this isn’t noted in the press release or the circular.

What’s my point beyond explaining how these things work to get deals done?  Lawyers are really good at writing things in ways that don’t highlight salient points, like how a deal point might affect voting control.  I’m definitely not passing judgment on whether this deal is good or bad for anyone (I’m just a lawyer), and I’m definitely not saying that anything is buried or hidden here – all of the information is in the offering circular and the press release in plain sight.  Instead, I’m saying that people ought to read the documents****.  We all complain about regulation, and certainly the burdens of disclosure requirements are, well, burdensome, and yes, the bad actors (see, e.g., Enron) spoil the fun for everyone, and yes, lawyers don’t make these things easy to read (see above), but in the end, there’s a good reason that securities regulators require fulsome disclosure of information so that investors and the public may make truly informed decisions.  It’s a bit similar to how the regulations in the Cannabis industry are making life difficult for everyone, and still need to be worked out, but in the long run, will provide the industry with legitimacy and trust in the eyes of the consumer.

On a lighter note, Joe Montana is diversifying his portfolio: (link). 

Excelsior!

Oh, ICYMI, Eaze issued its 2018 year-end report with lots of CA-focused user data: (link).

*yes, I’m making a presumption about the value of your time.

**yes, this is allowed.

***most likely not (really).

****even when their lawyers (or random lawyers not giving legal advice) tell them not to bother.

Written by: Marc Hauser