The commercial litigation landscape for CBD, hemp and marijuana is constantly evolving as federal and state courts issue decisions that impact investors, commercial contracts, employment issues, intellectual property and insolvency. The CannaBizDisputes™ blog regularly tracks and reports on these developments.
Is breaking up hard to do? Potential buyer uses litigation and arbitration to try to avoid acquisition
After a wave of combinations and free flow of investment money to cannabis companies, merger and acquisition activity has dramatically slowed in the cannabis sector. In part, state and local regulatory agencies have been slow to approve the combinations and/or approve transfers of licenses necessary to permit legal sales and distribution and federal antitrust regulators, facing a new industry for the first time, have been slow to provide antitrust clearances. In addition, the latter half of 2019 saw sustained and significant drops in cannabis stock prices, a dearth of capital for external financing and the failure of enabling federal banking (SAFE Banking Act) legislation or federal legislation permitting deference to state legalization (the STATES Act).
Not surprisingly, we are beginning to see efforts by buyers to back out of proposed combinations or to alter the mix of cash and buyer stock as purchase consideration. One such example is a complaint filed in the United States District Court of Arizona, Harvest Health & Recreation Inc. v. Falcon International, Corp. (D. Arizona, Docket No. 2:20-cv-00035-DLR). Although formally a petition to compel arbitration under the terms of a merger agreement, the complaint identifies both the relief Harvest Health, a multistate operator, seeks – including termination/rescission of the merger agreement, the return of $51.7 million paid to Falcon International and its control persons, and the appointment of a receiver. The basis for its claim are various alleged misrepresentations and breaches of representation and warranties and the existence of a Material Adverse Effect under the merger agreement, including alleged failure to produce auditable financial information, the failure to accurately present its financial condition on Falcon’s Interim Balance Sheet and alleged failures to comply with California state law and not transport marijuana across state lines. Falcon responded by moving to dismiss for lack of jurisdiction and issuing a press release in which it stated it had the right under the merger agreement to require Harvest to pay a $50 million breakup fee. Falcon further contended that the amounts previously funded are convertible into Falcon equity.
Does the Harvest Health case portend a wave of breakup litigation? Or do the facts of the case simply reflect the concerns Harvest had alleged in their specific deal? Harvest has announced plans to pursue other acquisitions – such as an $87.5 million bid for Interurban Capital Group, which owns and operates Have a Heart – owner of 11 cannabis dispensaries in California, Washington and Iowa. It’s too soon to tell, but it is an important trend to track.
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