HEXO Corp. and Newstrike Brands Ltd. (Re), 2019 CanLII 49285

May 31, 2019

AND

Background

The securities regulatory authority in Ontario (Decision Maker) has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) that:

Newstrike be exempt from the continuous disclosure obligations under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) (the Continuous Disclosure Requirements);
Newstrike be exempt from the requirements for certification of disclosure in annual and interim filings under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings (NI 52-109) (the Certification Requirements);
the insiders of Newstrike be exempt from the requirement to file an insider profile under National Instrument 55-102 System for Electronic Disclosure by Insiders (NI 55-102) in respect of securities of Newstrike (the Insider Profile Requirements); and
the insiders of Newstrike be exempt from the insider reporting requirements under National Instrument 55-104 Insider Reporting Requirements and Exemptions (NI 55-104) and related Legislation in respect of securities of Newstrike (the Insider Reporting Requirements)

(collectively, the Exemption Sought)

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application;

(b) the Filers have provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador; and

(c) the decision is the decision of the principal regulator and evidences that decision of the securities regulatory authority or regulator in each of the other Jurisdictions.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

This decision is based on the following facts represented by the Filers:

Newstrike

Newstrike was incorporated on September 24, 2004 under the Business Corporations Act (Ontario) (the OBCA).
The head office of Newstrike is located at 390 Bay Street, Suite 612, Toronto, Ontario M5H 2Y2.
Newstrike is a reporting issuer under the securities legislation of each of the provinces of Canada, other than Quebec.
Newstrike is an electronic filer under National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR) (NI 13-101).
The authorized share capital of Newstrike consists of an unlimited number of common shares (the Newstrike Shares). As of March 13, 2019, there were 557,246,090 Newstrike Shares issued and outstanding.
As of March 13, 2019, there were also issued and outstanding:

(i) options to purchase an aggregate of 35,073,041 Newstrike Shares (the Newstrike Options);

(ii) 69,701,500 warrants to purchase Newstrike Shares at an exercise price of $1.75 with an expiry date of February 16, 2020 issued pursuant to a warrant indenture (the February 2020 Warrant Indenture) between Newstrike and TSX Trust Company (TSX Trust) dated February 16, 2018 (the February 2020 Warrants);

(iii) 34,550,000 warrants to purchase Newstrike Shares at an exercise price of $1.00 with an expiry date of June 19, 2023 issued pursuant to a warrant indenture (the June 2023 Warrant Indenture) between Newstrike and TSX Trust dated June 19, 2018 (the June 2023 Warrants, and together with the February 2020 Warrants, the Listed Newstrike Warrants); and

(iv) 9,445,140 unlisted warrants to purchase an aggregate of 9,445,140 Newstrike Shares (the Unlisted Newstrike Warrants, and together with the Listed Newstrike Warrants, the Newstrike Warrants).

As of March 13, 2019, the Newstrike Shares were listed on the TSX Venture Exchange (TSXV) under the symbol “HIP” and the February 2020 Warrants and June 2023 Warrants were listed on the TSXV under the symbols “HIP.WT” and “HIP.WT.A”, respectively.

HEXO

HEXO was incorporated on October 29, 2013 under the OBCA.
The head office of HEXO is located at 204-290 Boulevard Saint-Joseph, Gatineau, Québec, J8Y 3W9.
HEXO is a reporting issuer in all jurisdictions of Canada.
HEXO is an electronic filer under NI 13-101.
The authorized share capital of HEXO consists of an unlimited number of common shares (HEXO Shares) and an unlimited number of Special Shares issuable in series. As of March 13, 2019, there were 210,436,205 HEXO Shares issued and outstanding.
As of March 13, 2019, there were also issued and outstanding:

(i) options to purchase an aggregate of 19,222,727 HEXO Shares; and

(ii) warrants to purchase an aggregate of 31,343,067 HEXO Shares.

The HEXO Shares are listed on the TSX under the symbol "HEXO".

The Plan of Arrangement

HEXO entered into a definitive agreement (the Arrangement Agreement) with Newstrike on March 13, 2019, which provided the terms and conditions under which HEXO would acquire all of the issued and outstanding Newstrike Shares.
The acquisition was implemented by way of a court-approved plan of arrangement under the OBCA (the Arrangement). Under the Arrangement, in exchange for each Newstrike Share, HEXO issued to shareholders of Newstrike (the Newstrike Shareholders) 0. 06332 of a HEXO Share (the Share Consideration), subject to the terms of the Arrangement. As a result of the Arrangement, Newstrike became a wholly-owned subsidiary of HEXO.
On April 15, 2019, Newstrike obtained an interim order from the Ontario Superior Court of Justice (Commercial List) (the Court) specifying certain requirements and procedures for a special meeting of the Newstrike Shareholders for the purpose of approving the Arrangement (Newstrike Meeting).
On May 17, 2019, Newstrike Shareholders approved the Arrangement with an affirmative vote of approximately 97.6% of the votes validly cast at the Newstrike Meeting.
On May 23, 2019, Newstrike received final approval of the Court for the Arrangement.
The Arrangement was completed on May 24, 2019.
Under the Arrangement, among other things, the following occurred:

(i) HEXO acquired all of the issued and outstanding Newstrike Shares not already owned by HEXO in exchange for the payment to Newstrike Shareholders of the Share Consideration; and

(ii) each Newstrike Option was deemed to be exchanged for an option to purchase 0.06332 of a HEXO Share (each a Replacement HEXO Option) in accordance with the Arrangement and each such Newstrike Option was cancelled.

Upon completion of the Arrangement, the Newstrike Warrants remain outstanding as warrants of Newstrike that upon exercise entitle the holder thereof to receive the Share Consideration.
On May 30, 2019, the TSX issued its final bulletin approving the listing of all HEXO Shares issued or to be issued as a result of the Arrangement (including those HEXO Shares to be issued upon exercise of HEXO Replacement Options and Newstrike Warrants).
HEXO has reserved 9,208,032 HEXO Shares for issuance upon the exercise of the outstanding HEXO Replacement Options and the Newstrike Warrants.
In connection with the Arrangement, Newstrike mailed to the Newstrike Shareholders a management information circular (Circular) containing prospectus-level disclosure of the business and affairs of each of Newstrike and HEXO and information on the Arrangement, a copy of which has been posted on SEDAR under Newstrike's profile.
Newstrike also mailed the Circular to holders of the Newstrike Warrants and holders of the Newstrike Options, providing them with prior notice of the Arrangement and the impact on such securities.
As a result of the Arrangement, the only securities of Newstrike that are listed for trading on a published market are the Listed Newstrike Warrants.
On May 29, 2019, the Newstrike Shares were delisted from the TSXV.
As required by the terms of the February 2020 Warrant Indenture and the June 2023 Warrant Indenture, HEXO and Newstrike have entered into supplemental warrant indentures with TSX Trust with respect to the Listed Newstrike Warrants. HEXO is bound by the terms and covenants thereof and upon exercise of such Listed Newstrike Warrants, holders will also be entitled to receive the Share Consideration
As required by the terms of the warrant indentures and any supplemental indentures and/or certificates representing, as applicable, the Unlisted Newstrike Warrants, HEXO is bound by the terms and covenants thereof and upon exercise of such Unlisted Newstrike Warrants, holders will also be entitled to receive the Share Consideration.
As a result of the Arrangement, the only securities of Newstrike that are held by persons other than HEXO are the outstanding Newstrike Warrants which are exercisable for, or convertible into the Share Consideration.
Newstrike cannot rely on the exemption available in section 13.3 of NI 51-102 for issuers of exchangeable securities because the Newstrike Warrants are not "designated exchangeable securities" as defined in NI 51-102 as none of the holders of the Newstrike Warrants will have voting rights in respect of HEXO in their capacity as warrantholders.
Certain of the warrant indentures governing the Newstrike Warrants include a covenant that Newstrike will use commercially reasonable efforts to maintain its status as a reporting issuer not in default of the requirements of the securities laws of the Provinces of Canada, other than Quebec, for a period of time from the date of the indenture and will make all requisite filings and otherwise take all requisite steps under the securities laws.
None of the warrant indentures governing the Newstrike Warrants requires Newstrike to deliver to holders of the Newstrike Warrants any continuous disclosure materials of Newstrike.
Each of the Filers is not in default of any requirement under securities legislation in the jurisdictions in which it is a reporting issuer.
Newstrike has no intention of accessing the capital markets in the future by issuing any further securities to the public and has no intention of issuing any securities to the public other than those that are outstanding on completion of the Arrangement.
It is information relating to HEXO, and not to Newstrike, that is of primary importance to holders of the Newstrike Warrants as the Newstrike Warrants shall be exercisable for/convertible into only the Share Consideration. In addition, as Newstrike is a wholly-owned subsidiary of HEXO, HEXO will consolidate Newstrike with HEXO for the purposes of financial statement reporting. As such, the disclosure required by the Continuous Disclosure Requirements applicable to Newstrike would not be meaningful or of any significant benefit to the holders of the Newstrike Warrants and would impose a significant cost on Newstrike.

Decision

The Decision Maker is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.

The decision of the Decision Maker under the Legislation is that the Continuous Disclosure Requirements do not apply to Newstrike provided that:

(a) HEXO is the beneficial owner of all of the issued and outstanding voting securities of Newstrike;

(b) HEXO is a reporting issuer in a designated Canadian jurisdiction (as defined in NI 51-102) and has filed all documents it is required to file under NI 51-102;

(i) the Newstrike Warrants;

(ii) securities issued to and held by HEXO or an affiliate of HEXO;

(iii) debt securities issued to and held by banks, loan corporations, loan and investment corporations, savings companies, trust corporations, treasury branches, savings or credit unions, financial services cooperatives, insurance companies or other financial institutions; and

(iv) securities issued under exemptions from the prospectus requirement in section 2.35 of National Instrument 45-106 Prospectus Exemptions;

(d) Newstrike files in electronic format:

(i) if HEXO is a reporting issuer in the local jurisdiction, a notice indicating that Newstrike is relying on the continuous disclosure documents filed by HEXO and setting out where those documents can be found in electronic format; or

(ii) copies of all documents HEXO is required to file under securities legislation, other than in connection with a distribution, at the same time as the filing by HEXO of those documents with a securities regulatory authority or regulator;

(e) HEXO concurrently sends to all holders of the Newstrike Warrants all disclosure materials that would be required to be sent to holders of similar warrants of HEXO in the manner and at the time required by securities legislation;

(f) HEXO immediately issues in Canada and files any news release that discloses a material change in its affairs; and

(g) Newstrike immediately issues in Canada a news release and files a material change report in accordance with the Part 7 of NI 51-102 for all material changes in respect of the affairs of Newstrike that are not also material changes in the affairs of HEXO.

The further decision of the Decision Maker under the Legislation is that the Certification Requirements do not apply to Newstrike provided that:

(a) Newstrike is not required to, and does not, file its own Interim Filings and Annual Filings (as those terms are defined under NI 52-109);

(b) Newstrike files in electronic format under its SEDAR profile either: (i) copies of HEXO's annual certificates and interim certificates at the same time as HEXO is required under NI 52-109 to file such documents; or (ii) a notice indicating that it is relying on HEXO's annual certificates and interim certificates and setting out where those documents can be found for viewing on SEDAR; and

(c) Newstrike is exempt from or otherwise not subject to the Continuous Disclosure Requirements and Newstrike and HEXO are in compliance with the conditions set out in paragraph 1 above.

The further decision of the Decision Maker under the Legislation is that the Insider Profile Requirements and Insider Reporting Requirements do not apply to any insider of Newstrike in respect of securities of Newstrike provided that:

(a) if the insider is not HEXO;

(i) the insider does not receive, in the ordinary course, information as to material facts or material changes concerning HEXO before the material facts or material changes are generally disclosed; and

(ii) the insider is not an insider of HEXO in any capacity other than by virtue of being an insider of Newstrike;

(b) HEXO is the beneficial owner of all of the issued and outstanding voting securities of Newstrike;

(c) if the insider is HEXO, the insider does not beneficially own any Newstrike Warrants other than securities acquired through the exercise of the Newstrike Warrants and not subsequently traded by the insider;

(d) HEXO is a reporting issuer in a designated Canadian jurisdiction;

(e) Newstrike has not issued any securities and does not have any securities outstanding, other than:

(i) the Newstrike Warrants;

(ii) securities issued to and held by HEXO or an affiliate of HEXO;

(iv) securities issued under exemptions from the prospectus requirement in Section 2.35 of NI 45-106; and

(f) Newstrike is exempt from or otherwise not subject to the Continuous Disclosure Requirements and Newstrike and HEXO are in compliance with the conditions set out in paragraph 1 above.

As to the Exemption Sought (other than from the statutory Insider Reporting Requirements):

“Winnie Sanjoto”

Manager, Corporate Finance

As to the Exemption Sought from the statutory Insider Reporting Requirements:

“Heather Zordel” “Cecilia Williams”

Commissioner Commissioner Ontario Securities Commission Ontario Securities Commission