Cannabis company restructured under the CBCA

The Cannabist Company Holdings Inc. et al v. Murchinson Ltd., 2025 ONSC 300
What is the test for the approval of a restructuring under the CBCA?

Summary: In this case, the Court considered whether it should approve a CBCA plan of arrangement for a cannabis company seeking to extend the maturity of approximately $270 million of senior notes from June 2025 until the end of 2028. The arrangement was opposed by certain noteholders who argued they invested in the company pursuant to an arrangement that provided the notes would not be devalued or swallowed up by later debt. Nevertheless, the Court approved the arrangement. Without the contemplated restructuring transactions, the likely outcome would be a CCAA filing, resulting in higher costs and greater risk for the company and its business, the elimination of shareholder value that would otherwise be preserved under the arrangement, and risk to creditors that would otherwise be unaffected under the contemplated restructuring transactions.

The Applicants operated a fully integrated cannabis business, including cultivation, manufacturing, and retail, across 12 states in the United States where medical or adult-use cannabis is legally permitted. The Applicants’ indebtedness consisted primarily of approximately $270 million of Senior Notes. The non-payment of principal of one series of Senior Notes would give rise to cross-defaults under other series of notes and, subject to certain limited conditions, all Senior Notes could be accelerated.

The Applicants sought a final order approving a plan of arrangement (the “Arrangement”) pursuant to s. 192 of the Canada Business Corporations Act. The Arrangement was designed to lead to the extension of the Senior Notes until December 31, 2028. The Order was opposed by Murchinson Ltd. on behalf of certain Senior Noteholders of 2025 Senior Notes. Murchinson argued that the Senior Noteholders invested in the Applicants pursuant to an arrangement that provided contractual guardrails to ensure the Notes would not be devalued or swallowed up by later debt the Applicants may assume.

In order to grant final approval of a CBCA arrangement, the Court must be satisfied that: (1) there has been compliance with all statutory and court-mandated requirements; (2) the application has been put forward in good faith; and (3) the arrangement is fair and reasonable. In the context of a debt restructuring, the goal of s. 192 of the CBCA is to “provide a broad procedure aimed at facilitating the restructuring of corporations” and as such the provision ought to be broadly and liberally interpreted. As well, the Court is to focus on the terms and impact of the arrangement and not the process by which the arrangement was reached.

In order to satisfy part one of the test, the Court must be satisfied that: (1) the applicant is a “corporation” under the CBCA; (2) the proposed transaction is an “arrangement” under s. 192(1) of the CBCA; (3) the applicant is not insolvent; and (4) it is not practicable to effect a fundamental change in the nature of an arrangement under any other provision of the CBCA. The Court confirmed that each of these requirements was satisfied by the proposed Arrangement.

With respect to the second part of the test, the Court noted that an arrangement is put forward in good faith where it it is proposed to further a valid business purpose. Here, the Arrangement was being put forward to proactively address the pending maturity of the 2025 Notes (and corresponding cross-defaults of the other Senior Notes) and extend the maturity until December 31, 2028. There was no dispute that the Applicants faced an impending liquidity shortfall that needed to be addressed. The proposed extension was particularly important given the Applicants’ evidence that there was a liquidity shortfall such that it was not expected the Applicants could repay the 2025 Notes at their upcoming maturity.

As to the third step, in assessing the fairness and reasonableness of an arrangement, a Court must be satisfied that (1) the arrangement has a valid business purpose, and (2) the objectives of those whose legal rights are being arranged are being resolved in a fair and balanced way. Section 192 of the CBCA recognizes that major changes may be appropriate, even where they have an adverse impact on the rights of particular individuals or a particular group. An arrangement often involves a compromise on the part of all parties for the greater good and the Court must be careful not to cater to the needs of one particular group, but rather to consider the overall fairness of any arrangement as well as the fairness to individual stakeholders.

The Court must scrutinize the proposed arrangement and conduct a careful review of the proposed transactions. The level of scrutiny by the Court is related to the degree of necessity of the arrangement. If the arrangement is necessary for the corporation’s continued existence, Courts will be more willing to approve it despite its prejudicial effect on some security holders.

Here, without the contemplated restructuring transactions, the Applicants would not have the liquidity to repay the 2025 Notes at their maturity in June 2025 to the detriment of the Applicants and their other stakeholders. Failing to pay the 2025 Notes at their upcoming maturity would result in a cross-default under the other Senior Notes, in which case, all the Senior Notes would become due and paid rateably and proportionately. The consequences of such default would be value destructive to the Applicants’ business and operations.

If the Arrangement were not completed, the likely outcome would be that the Applicants would need to seek creditor protection under the Companies’ Creditors Arrangement Act (the “CCAA”). The Applicants’ operations were carried out in the United States through US-based subsidiaries. Given the nature of the cannabis business, certain uncertainty existed in respect of the Applicants’ access to federal bankruptcy laws in the US. In any event, implementing any restructuring transaction through an insolvency process would result in higher costs and greater risk for the Applicants and their business, the elimination of shareholder value that would otherwise be preserved under the Arrangement, and risk to creditors that would otherwise be unaffected under the contemplated restructuring transactions. Accordingly, given that high level of necessity of the Arrangement to the Applicants, the degree of scrutiny was lessened.

In the restructuring context, the fairness, reasonableness, and equitable aspects of a plan must also be assessed in the context of the hierarchy of interests recognized by insolvency legislation and jurisprudence. Here, treating the Senior Noteholders in the same manner under the Arrangement was consistent with the rights of those creditors in an insolvency proceeding. Extending the maturity dates of the Senior Notes was a benefit to all parties in the proposed restructuring transactions as it provided stability for the Applicants for a longer time period, and benefited the Noteholders insofar as the contemplated New Notes would improve covenants and security.

The Court determined that the Arrangement was fair and reasonable in the specific circumstances of this case and granted the Applicants’ request for a final order under s. 192 of the CBCA.

Judge: Jane Dietrich, J.

Professionals involved:

• Lee Nicholson, Eliot Kolers, Philip Yang and Brittney Ketwaroo of Stikeman Elliott for the Applicants

• Brendan O’Neill, Brad Wiffen and Peter Kolla of Goodmans for the Supporting Noteholders

• Joseph Groia, David Sischy and Yona Gal of Groia & Company for the Respondent, Murchinson Ltd.