Canopy Growth Corp. (TSX: WEED) (Nasdaq: CGC) filed a revised proxy statement with the U.S. Securities and Exchange Commission that includes updates related to its strategy to accelerate entry into the U.S. cannabis industry through a U.S.-domiciled holding company, Canopy USA LLC.
One of the changes includes a reduction in the company’s economic interest in Canopy USA to no greater than 90%. The company will not own 100% of Canopy USA until cannabis becomes federally legal.
Canopy Growth created Canopy USA in October 2022. The new entity was intended to have its own management and board, on which Canopy Growth Corp. wouldn’t have voting rights.
In addition to capping the ownership interest, the revisions also cut back on the number of managers on Canopy USA’s board of managers from four to three, including the reduction of Canopy’s nomination right to a single manager.
It would also modify the terms of the initial protection agreement between Canopy and Canopy USA’s initial limited liability company agreement in order to eliminate certain negative covenants that were previously granted by Canopy USA in favor of Canopy.
The revisions would delegate to the Class A Nominees the authority to approve key decisions, which for greater certainty means that the Canopy nominee will not be permitted to vote on any key decisions while the company owns non-voting shares.
David Klein, CEO of Canopy Growth, said, “Canopy USA is a novel strategy designed to capitalize on a once-in-a-generation market opportunity. We are pleased to have found a path forward that enables us to stay within Nasdaq’s listing requirements, while preserving the meaningful value associated with this plan. We look forward to our continued collaboration with regulators and other stakeholders as we work to capture the attractive value in the U.S. market and position Canopy Growth for profitable growth and a fast start upon federal permissibility in the United States.”
Canopy said it will not consolidate the financial results of Canopy USA. Canopy said it expects to highlight the value of Canopy USA’s U.S. THC assets to investors following the acquisition of Acreage, Wana, and Jetty by Canopy USA.
In addition, the company noted that Nasdaq has indicated its position that companies that consolidate “the assets and revenues generated from activities in violation under federal law cannot continue to list on Nasdaq.”
Canopy also told investors that there can be no assurance that the SEC will agree with the proposed accounting treatment of Canopy USA.
“Moreover, there can be no assurance that we will remain listed on Nasdaq or any other exchange on which our Shares are currently listed on, which could have a material adverse effect on our business, financial condition and results of operations.”
Canopy intends to protect the value of its non-voting shares as the two parties have entered into a Protection Agreement, which remains in place until Canopy can totally own Canopy USA.
The Protection Agreement, according to the filing, requires Canopy USA to maintain and preserve its business organizations, properties, assets, rights, employees, goodwill and business relationships and provides Canopy with the ability to restrict the operations of Canopy USA, including, among other things, prohibitions on the following activities without the prior consent of Canopy:
- amending its constating or similar organizational documents;
- changing the size of the board of managers;
- declaring, setting aside, or paying any dividend or other distribution of any kind or nature;
- issuing additional securities to any person other than Canopy or its subsidiaries provided that any securities issued must include a repurchase right in favor of Canopy USA;
- amending the terms of any outstanding securities;
- reorganizing, amalgamating or merging with a third party;
- undertaking any dissolution, liquidation or winding-up, or any other distribution of assets for the purpose of winding up its affairs;
- incurring, in the aggregate, debt that exceeds a specified threshold;
- selling any single material asset or series of material assets of Canopy USA; and
- taking any action, or refraining from taking any action, or permitting any action to be taken or not taken, which could reasonably be expected to prevent, materially delay or otherwise impede the ability to convert the Non-Voting Shares into Canopy USA Class B Shares.
Canopy also commented on Acreage’s annual earnings that noted the company was a going concern: “In the event that Acreage is unable to continue as a going concern, the Amended Acreage Arrangement and the Floating Share Arrangement may not be completed. In the event that the Amended Acreage Arrangement and the Floating Share Arrangement are completed and Acreage is unable to continue as a going concern, this would have a negative impact on Canopy USA’s business, financial results and operations and have an adverse impact on the company’s United States strategy, and, ultimately, the company’s financial results and operations.”