What’s Up in Weed

January 10, 2018

By: Andrea Hill

I am pleased to bring you this instalment of my blog, rounding up what’s currently happening in the cannabis industry in Canada and abroad.

Brave New Year: What Lies Ahead for 2018

• Federally legal recreational cannabis!  After nearly a century of illegality, cannabis will resume its lawful standing this summer.  Canada will be the second country in the world to legalize pot federally, after Uruguay.  If the current national optimism is borne out, Canada stands to be a strong case study on drug policy to the world.
  • Have your say: The federal government has invited comments on proposed regulations to the Cannabis Act until January 15, 2018.  The regulations will be where a lot of the important details are set out for the new regime – including different categories of licences and rules for highly-anticipated edibles.
  • The proposed types of licences – cultivation, processing, and sale (here’s a diagram of which activities each would cover) – are designed to underpin a “diverse, competitive legal industry comprised of both large and small players in regions across the country.”  The government is interested in whether you think this multi-faceted licensing approach would accomplish that objective.  (The current regulations, in contrast, concentrate the authority to produce, process, and sell medical cannabis in each individual licensed producer.)
  • The survey also explores what the appropriate threshold should be to distinguish between “micro” and “standard” licences.
    • For example, a micro-cultivator might be differentiated from a standard cultivator based on the number of plants they can have, the size of their growing area, the volume of their total production, their gross revenue, or some other factor.
    • Micro-processors, in contrast, could be defined based on their total production, their on-site inventory, their gross revenue, or some other factor.
  • Health Canada has prepared a questionnaire through which you can submit comments on the regulations.  The questionnaire invites comment on the proper scope and criteria of security clearance. Designed to protect the integrity of the legal production system, security clearance is currently required for each director or officer of a licensed producer, as well as the senior person in charge (SPIC), the responsible person in charge (RPIC), and any alternate responsible person in charge (A/RPIC) of the LP.  The proposed Cannabis Act regulations would require security clearance for the following much broader group:
    • Individuals occupying a “key position” in the organization;
    • Directors and officers; any shareholders that own more than 25% of the organization (if it is privately held) or more than 25% of a privately held parent company; and individuals in a position to legally bind the licence applicant or holder; and
    • Individuals identified by the Minister of Health as requiring a security clearance based on the nature of their position and the level of risk associated with same.
  • The new regulations would specifically enable the Minister to refuse to grant clearances to individuals associated with organized crime, and individuals with past convictions for, or an association with, drug trafficking; corruption (for example, money laundering or fraud); or violent offences.
    • However – interestingly – the government wants your opinion on allowing individuals who have histories of non-violent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) to obtain security clearance and participate in key roles with licensed entities going forward.
    • One of the quirks of the ACMPR is that its inflexible security clearance requirement prevents many people with extensive (albeit illegally obtained) growing expertise from occupying key production roles, like SPIC and RPIC.  In theory, this would keep black market producers out of the new regulated medical cannabis world.  But in practice, LPs have either found ways around the requirement by hiring experienced (but non-cleared) growers to instruct the cleared staff, or by suffering through trial-and-error agriculture as they start from scratch and learn by experience.  Neither path seems like the most efficient use of resources.
    • A muscular example of the reparative policy the government is considering here was implemented in Oakland, California, which set aside 50% of its medical marijuana and cannabis business permits during the first phase of permitting for former offenders with marijuana-related convictions and residents of six neighbourhoods that police excessively targeted for marijuana arrests.
  • Some of the survey’ questions are, at first glance, impossibly broad (“What do you think about the proposed approach to providing access to cannabis for medical purposes?”).  But the majority of the questionnaire aims to take the public’s pulse on matters that have proved contentious in other jurisdictions – from types of products which should be available to THC potency limitations (something Colorado needed to iron out).
  • Complete the online questionnaire and tell the government what you want to see!
• Lots of M&A: Aurora has shown no signs of tiring in its attempted hostile takeover of CanniMed (see our prior blog post for some background).  On December 19, Aurora issued a take-over bid circular making the case for the hearts – and shares – of CanniMed shareholders.
  • A direct response to CanniMed’s management information circular, Aurora’s take-over bid circular seeks to convince CanniMed shareholder to tender their shares to Aurora.  It maligns CanniMed’s proposed Newstrike transaction, and takes swipes at CanniMed’s management (for example, it points out that CanniMed’s CEO, Brent Zettl, remarked to the New York Times earlier last year that he didn’t think recreational cannabis was “good for society”).
  • Aurora and CanniMed also took their fight to the securities commissions.  Right before the holidays, the Ontario and Saskatchewan securities commissions cleared off their desks by issuing coordinated orders responding to the applications made by both sides.
  • The securities commissions cease-traded the CanniMed poison pill, and rejected Aurora’s request to shorten the deposit period from 105 to 35 days, both as expected.
  • CanniMed lost its argument that their locked-up shareholders were joint actors with Aurora, which would have added significant complications for Aurora.
  • Aurora was, however, ordered to amend its news releases and the take-over bid circular to disclose:
    • any information that was obtained by Aurora from anyone in a “special relationship” with CanniMed;
    • any information that was material to Aurora in structuring, timing, or delivering its offer to CanniMed shareholders;
    • any other information within Aurora’s knowledge that would reasonably be expected to affect the decision of the security holders of CanniMed to accept or reject the offer made by the Aurora Offer; and
    • the circumstances under which, and the means by which, Aurora became aware that the CanniMed board would be meeting on November 13, 2017 to consider an arrangement agreement with Newstrike (the commissions determined that such information would reasonably be expected to affect the decision of CanniMed’s shareholders to accept or reject the Aurora offer).
  • While the written reasons for the securities commissions’ decisions have not yet been released,  Davies issued a useful analysis of the facts and the orders.
  • No matter how hard each side fights, however, purchase price can be an enormously influential factor in any takeover bid – and due to the recent surge in cannabis stock prices, Aurora faces the awkward fact that its offered purchase price ($24 in Aurora shares) is now less than the trading value of CanniMed shares (about $26).  In fact, CanniMed has publicly accused Aurora of “weighing down” its share price.
  • With share prices riding all-time highs, companies can use their own shares as currency to acquire other companies, as Aurora is attempting to do. High share prices or not, we’re likely to continue to see market consolidation – friendly and hostile – as we head towards the enactment of the Cannabis Act and the insatiable recreational market.
• Dispensaries – still here, still thriving: despite vows of eradication from city officials and law enforcement, illegal dispensaries still pepper neighbourhoods of Toronto and other major cities.  In fact, marijuana delivery services – which require minimal bricks and mortar and are harder to raid than dispensaries – are thriving.  The unregulated cannabis market, which has no compliance costs or quality control requirements, continues to undermine legalization’s chances of wiping out black market producers.
  • See the blazing yule before us: Although it may be a legal and political morass, the illegal cannabis industry is great for producing incredible headlines.  As the New York Times reported, an elderly couple was caught in Nebraska with 60 pounds – half a million dollars’ worth – of marijuana bagged up in their truck just before the holidays.  They told police they intended to give it away as Christmas presents.  It’s since been revealed that they are the parents of one very “surprised and upset” Vermont chief deputy county prosecutor.
• Proliferating LPs – Health Canada doesn’t seem to have slept since the summer.  There are currently 84 licensed producers, including a whopping 31 licensed since August! Since the ACMPR do not allow the government to refuse an application if the applicant submits the required materials and passes security clearance, many view this as the golden age of licensing.  The Cannabis Act as currently drafted clearly allows the government to set limits on applications and licences to match supply with demand – so the party may not last forever.
• “Intolerable uncertainty”: In the aftermath of US Attorney-General Jeff Sessions’ headline-grabbing rescission last week of the Cole Memo and other Justice Department guidance that protected state-compliant cannabis businesses from federal prosecution (see our prior blog post for details), Politico ran a compelling article asking whether Sessions had just improved the odds that Congress would full-out legalize cannabis to appease an angry and increasingly powerful industry.  (Thanks, CB!)
  • “The attorney general has created intolerable uncertainty from a growing industry that is now demanding legal protections from Congress,” Politico declares. “And lawmakers are listening.”
  • Sessions’ decision may have pleased cannabis critics, but it took a bite out of the valuations of some major companies.  For example, Scotts Miracle-Gro, a $6 billion company that has invested heavily in hydroponics and other horticulture products with an eye to the cannabis industry, lost 5% of its value in a single day.
  • It’s not only businesses that are exposed to the fickleness of Justice Department guidance – state coffers are, as well.  “Sessions’ antipathy for a drug that has lost much of its stigma among a wide cross section of Americans has only galvanized disparate factions in Congress to protect an industry that is expected to generate $2.3 billion in state tax revenue by 2020,” Politico observes.
  • Considering the majority of Republicans now support cannabis legalization, it’s hard to imagine what Sessions expected to gain from this move.
  • A bill called the Ending Federal Marijuana Prohibition Act, sponsored by Republican representative Thomas Garrett, may be the answer to restore certainty to the $6 billion cannabis industry.  The bill would remove marijuana from Schedule I and eliminate federal penalties for anyone engaged in state-legal activity.
  • One potential consequence that Politico didn’t discuss is the fact that removing marijuana from Schedule 1 could invite more mature companies into the industry – pharmaceutical, tobacco, and alcohol behemoths – that could crush corner-store cannabis businesses.  Constellation Brands, a giant alcohol beverages company, demonstrated its enthusiasm for the cannabis industry by making a quarter-billion-dollar investment in Canopy Growth Corporation last fall.  Part of the reason why cannabis has flourished as a grassroots industry is because industrial giants have held back out of fear of prosecution.  It would be interesting to know whether state-level cannabis businesses actually want marijuana to be rescheduled, and what their ideal solution would look like.

What’s Up in Weed is not legal or financial advice. It is a blog by SkyLaw which is made available for informational purposes only and should not be used as a substitute for professional advice from a lawyer. This blog is subject to copyright and may not be reproduced without our permission. 

If you have any questions or would like further information, please contact us. The SkyLaw team would be delighted to speak with you.

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