COURT FILE NO.: CV-19-630872-00CL
DATE: 20210113
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
C.G.S. Foods Inc.
Applicant
– and –
Trichome Financial Corp.
Respondent
Simon Bieber and Jordan Katz, for the Applicant
Matthew P. Maurer, for the Defendant
HEARD: January 6, 2021
C. Gilmore, J.
judgment on application
OVERVIEW
[1] This Application concerns the interpretation of a credit agreement (“the Agreement”) entered into between the Applicant (“CGS”) and the Respondent (“Trichome”). Under the Agreement, CGS granted share purchase warrants (“the Warrants”) to Trichome. The issue to be determined on this application is whether the Warrants are exercisable by Trichome at any time or only if CGS engages in an equity sale or share issuance. These events are referred to in the Agreement as a Liquidity Event and an Additional Security Issuance respectively (referred to in this judgment at times as “triggering event(s)”).
[2] CGS’ position is that a triggering event is required before Trichome can exercise its Warrants. Trichome’s position is that it has not attempted to exercise its Warrants but, if it chooses to do so, they can be exercised at any time or on occurrence of any triggering event.
BACKGROUND FACTS
[3] The principal and sole shareholder of CGS is Clint Seukeran. In January 2019, CGS won a lottery conducted by the Alcohol and Gaming Commission of Ontario (“the AGCO”) which gave it the right to apply for one of 25 cannabis retail licence awarded in Ontario. Mr. Seukeran had no experience in the retail cannabis business when he won the lottery.
[4] The lottery rules required that CGS submit a Retail License Application and a Retail Store Authorization Application, a $10,000 application fee and a standby Letter of Credit in the amount of $50,000 within one week of winning the lottery. CGS was required to open its doors by April 1, 2019.
[5] Mr. Seukeran engaged a cannabis industry consultant and legal counsel to assist him. He then obtained a lease for a store location in Brampton that met location and lottery rule requirements.
[6] Mr. Seukeran required financing for the retail operation which he called “Ganjika House.” He placed a second mortgage on his personal residence for $420,000 which he used for lease payments, equipment, leasehold improvements, point of sale software and staff. These funds allowed Ganjika House to make certain purchases, but additional financing of up to $1,000,000 was needed for inventory and other start up costs in order to be ready for the required opening date of April 1, 2019.
The Credit Agreement
[7] Mr. Seukeran was introduced to Trichome through his cannabis consultant as a potential financing partner in February 2019. Trichome had experience lending to cannabis related businesses. Mr. Ruscetta, on behalf of Trichome, presented a term sheet to Mr. Seukeran in March 2019.
[8] The term sheet set out a debt financing package for a revolving credit facility of up to $1,000,000 for inventory (“Facility A”) and a secured non-revolving term loan for $500,000 with an option for a further $500,000 loan (“Facility B”). Interest on Facility A was payable monthly at a rate of 21.6% per annum. Interest on Facility B accrued monthly at a rate of 8.5% per annum and was payable at maturity. Mr. Seukeran instructed his counsel James Padwick to negotiate the financing agreement with Trichome. The Agreement was entered into by the parties on March 15, 2019.
[9] The loan arrangement was a risky one for Trichome given that traditional banks or credit unions would not loan to Mr. Seukeran; he had no previous experience in the cannabis retail market, and CGS had no assets. Therefore, in addition to interest rates reflective of its risk, Trichome sought equity in CGS by way of Warrants allowing it to purchase common shares of CGS. The term sheet provided for Trichome to receive Warrants as follows:
Upon the Licensing Event, the Borrower will issue to the Lender a number of Warrants equal to the Initial Amount divided by the Warrant Exercise Price (defined below) and a number of Warrants equal to the Optional Amount divided by the Warrant Exercise Price only if the Optional Amount is provided to CGS. Each Warrant will entitle the Lender to acquire, for a period of 5 years from the date of Closing, one share of the Borrower. The Warrants may be exercised, on a cashless basis, at a price per share of CGS equal to a share price which is the result of i) a valuation of CGS equal to $5 million and ii) the number of shares currently outstanding of CGS (the “Warrant Exercise Price”).
[10] Attached to the Agreement was a Warrant Certificate with a preamble which provides as follows:
THIS IS TO CERTIFY THAT for value received, TRICHOME FINANCIAL CORP. (the “Holder”) is entitled, for each whole Warrant calculated pursuant to the terms hereof (each, a “Warrant”), to purchase one common share (“Share”) in the capital of C.G.S. FOODS INC. (the “Corporation”) at any time prior to 5:00 p.m. (Toronto time) on the date that is five (5) years from the date hereof (or if such day is not a Business Day (as defined below), the next following Business Day) (the “Expiry Time”) at the Warrant Exercise Price (as such term is defined below). The number of Shares which the Holder is entitled to acquire upon exercise of the Warrants and the Warrant Exercise Price are subject to adjustment as hereinafter provided.
[11] Trichome’s entitlement to Warrants is based on the principal amount of Facility B drawn by CGS. If no optional amounts had been drawn by CGS, the Agreement provided for a deemed issuance of a further $250,000 in Warrants. At the time of issuance of this Application, it is not disputed that CGS had notionally issued Warrants equivalent to $750,000.
[12] The number of Warrant to be received by Trichome is calculated by a formula in the Warrant Certificate as follows:
“Warrant Exercise Price” means lesser of (i) the number determined by dividing (a) $6,500,000 by (b) the number of issued and outstanding Shares of the Corporation then outstanding, on a fully diluted basis, and (ii) the consideration per Share (or the conversion price in the event of an issuance of convertible securities) received by the Corporation in connection with its most recent Additional Security Issuance. “Fully diluted basis” means all outstanding securities, as converted into Shares, except for the Warrants.
[13] Using the formula above, and considering that CGS issued 100 common shares owned by Mr. Seukeran, the Warrant Exercise Price would be $65,000 ($6,500,000/100) and Trichome would be entitled to 11.5385 Warrants ($750,000/$65,000). The $6,500,000 figure was a “threshold valuation” assigned to CGS in the Agreement, which meant that Trichome would benefit from any shares issued by CGS at a price greater than $65,000. It also protected Trichome in the event CGS issued additional shares at a lower price by allowing them to acquire more shares.
[14] The dispute in this case relates to whether the Warrants may be exercised any time or only on the occurrence of a triggering event. There is no dispute in this case that CGS has not engaged in a triggering event nor has Trichome sought to assert any entitlement to purchase shares under the Warrant Certificate. The regime for exercising a Warrant upon a triggering event is addressed in section 4 of the Warrant Certificate as follows:
The Corporation shall provide written notice to the Holder no less than 20 days prior to the occurrence of a Liquidity Event or Additional Security Issuance. Within (a) 45 days of the consummation by the Corporation of an Additional Security Issuance, or (ii) if such Share Issuance requires the determination of Fair Market Value by a valuator, 30 days after such determination, and in either case on or prior to the Expiry Time (the “Exercise Period”), the Holder may exercise all or any number of Warrants represented hereby (an “Exercise”), upon delivering to the Corporation at its principal office above (or such other address in Canada as may be notified in writing by the Corporation) a duly completed and executed exercise notice in the form attached hereto (the “Exercise Notice”) evidencing the election (which on delivery to the Corporation shall be irrevocable) of the Holder to exercise the number of Warrants set forth in the Exercise Notice (which shall not be greater than the number of Warrants represented by this Warrant Certificate, as adjusted from time to time in accordance with this Warrant Certificate). For greater certainty the Holder is not compelled to exercise any Warrants upon an Additional Security Issuance….
[15] The Agreement was terminated on September 25, 2019 when all amounts due under the Agreement were paid out by CGS. The Warrants, however, survive the termination of the Agreement.
The Positions of the Parties
The Plaintiff
[16] CGS submits that the Agreement and Warrant Certificate must be read in context. Paragraph 3 of the Warrant Certificate sets out how the Warrants are to be exercised. Paragraphs 4 through 7 of the Warrant Certificate set out the timing, formula and adjustments upon exercise of the Warrants. There is no similar mechanism for cash Warrants. Focusing only on three words in the preamble ignores the rest of the document. CGS takes the position that Trichome is attempting to put back into the Warrant Certificate language which the parties negotiated out.
[17] In the course of negotiating the terms of the Warrant Certificate the parties agreed to delete the reference to the exercise of cash Warrants. By relying on the words “at any time” in the first paragraph of the Warrant Certificate, Trichome ignores the parties’ negotiations and the fact that the rest of the Warrant Certificate relates to the cashless exercise of Warrants.
[18] Trichome’s counsel at Torkin Manes LLP provided a draft of the Credit Agreement including the Warrant Certificate to Mr. Padwick in the evening of March 12, 2019. In his responses, Mr. Padwick communicated his clear expectation (and understanding of a prior call with Mr. Ruscetta) that Trichome’s Warrants would “only be exercisable on [a] liquidity event”, and sought clarity from Mr. Ruscetta by asking: “No liquidity event, no exercise…correct?” Mr. Ruscetta responded to Mr. Padwick late in the evening of March 13, 2019 as follows: “Yes on liquidity event we can exercise. In theory we can exercise anytime. Practically speaking one never exercises an option, especially a five year one, unless they want or can sell their shares. So no liquidity then why would we exercise.”
[19] When questioned at length about this email in cross-examination, Mr. Ruscetta obfuscated, and made numerous attempts to avoid answering straightforward questions about this email. But ultimately, he admitted the accuracy of the statement that, practically, Trichome would never exercise its Warrants absent a liquidity event.
[20] Mr. Seukeran’s counsel reviewed a further draft of the Warrant Certificate on March 13, 2019 and sent an email to Mr. Ruscetta and his counsel as follows:
I just reviewed the Warrant and sent comments to Clint [Mr. Seukeran]. I had understood this to be a cashless Warrant exercisable on a liquidity event. That’s not what the Warrant says. Please explain.
I have other comments, but this is fundamental.
[21] Mr. Padwick sent his marked-up version of the Warrant Certificate to Mr. Ruscetta on March 14, 2019. In the margin, next to the preamble, Mr. Padwick handwrote the following comments:
This was only supposed to be exercisable during a Liquidity Event. That is why it was cashless. JP [James Padwick] and client had a call with Michael [Ruscetta] to discuss exercise. It is exercisable on any equity sale (or convertible debt sale) occurring in next 5 years. If such sale occurs, 3 options: 1) Exercise option and get cash, 2) take shares equal to cash they would have received based on sale price of shares in equity sale, 3) do nothing – hold Warrants on thought they may be exercised later. Per defn. of “Warrant Exercise Price” there is down round protection.
[22] CGS submits it is clear from these comments that Mr. Padwick was resisting a cash sale of Warrants at any time.
[23] When Mr. Padwick received a revised version of the Warrant Certificate on March 15, 2019, he still had questions. He sent an email to Trichome’s counsel as follows:
I just skimmed this. This says “at any time” the Warrants may be exercised. That is different than exercising the Warrants when the money actually comes in – on a liquidity event or equity raise. What is this about fair market value? This seems a like a redeal. Did I miss a conversation between Clint and Trichome?
[24] As a result of the exchange of emails, paragraph 4 of the Warrant Certificate was amended. The words at the beginning of that paragraph “At any time, or from time to time” were deleted. Instead, the paragraph began, “Upon the occurrence of a Liquidity Event or upon the consummation by the Corporation of an Additional Security Issuance…” and the triggering events were added into this paragraph.
[25] CGS also relies on Mr. Ruscetta’s evidence on cross-examination in which he agreed that the resolution of the Warrant exercise and the ratchet provision were resolved upon removing the words set out above from paragraph 4. There were no further revisions to paragraph 4 before it was signed.
[26] CGS also relies on an email from Mr. Seukeran to the AGCO on March 21, 2019 in which he forwards responses from Mr. Padwick to certain questions raised by the AGCO about the Agreement. In response to the AGCO’s question about when the Warrants can be exercised by Trichome, Mr. Padwick responds;
The Warrants are exercisable for 5 years but cannot be exercised by Trichome until a “Liquidity Event” or “Additional Security Issuance”. Liquidity Event is basically a change of control, and Additional Security Issuance is basically an issuance of shares or things convertible into shares. So if CGS takes any action that results in a change of control or does not issue shares (or things convertible into shares) the Warrants cannot be exercised – they just sit there.
[27] While CGS concedes that Trichome has not given notice of any intention of exercising any Warrants, CGS’ concern began upon the receipt of emails from Mr. Ruscetta in September 2019. Mr. Ruscetta and Mr. Seukeran exchanged emails when Mr. Ruscetta became aware that Mr. Seukeran had repaid the 2nd mortgage on his house without advising Trichome in advance. This was a breach of the Agreement. Mr. Seukeran offered to repay the Facility B debt immediately. In the course of the exchange of emails, Mr. Ruscetta responded;
You can certainly repay Facility B if you choose. But we also have the right to convert our Warrants into shares of CGS at any time.
And in another email on the same day;
Moreover, as a prospective 10% shareholder if we exercised our Warrants today, any distributions from CGS would have to be made on a pro rate basis.
[28] Shortly after Mr. Seukeran received these emails, he commenced this Application since Mr. Ruscetta’s comments did not align with his understanding of the terms of the Warrant Certificate.
The Defendant
[29] Trichome focused on the preamble to the Warrant Certificate and, specifically, the last two lines of the preamble which state, “The number of Shares which the Holder is entitled to acquire upon exercise of the Warrants and the Warrant Exercise Price are subject to adjustment as hereinafter provided.” Trichome submits that this clarifies how the exercise process works. That is, Trichome can buy the shares based on the Warrant Certificate but subject to adjustment with respect to the number of shares and the price. There are no other restrictions. If there was an intention that the Warrants could only be exercised upon triggering events, that would have been stated in the Warrant Certificate.
[30] Further, and in response to CGS’ position on there being no mechanism in the Warrant Certificate dealing with a cash Warrant, Trichome submits that no system is needed. Once a price is established, the share is purchased. The fact that there is no notice provision does not mean that the Warrant Certificate is deficient or that the right to cash Warrants is somehow negated. Paragraph 4 and onward in the Warrant Certificate is a completely different regime based on triggering events. The cash and cashless regimes are able to coexist as drafted.
[31] In terms of the negotiations leading up to the signing of the Agreement on March 15, 2019, Trichome points out that a call occurred between Mr. Padwick, Mr. Ruscetta and others on the morning of March 14, 2019. This is clear from the emails produced. There were also other calls on March 15, 2019 with respect to the various queries raised by Mr. Padwick in his emails. When the revised version of the Warrant Certificate was sent back to Mr. Padwick, it contained the revisions to Section 4 which relates to the exercise of cashless Warrants. There was no change to the general provision allowing Trichome to exercise Warrants. The provision relating to the exercise of Warrants “at any time” in the preamble remained intact.
THE LAW AND ARGUMENT
[32] CGS urges the court to refer to general principles of commercial contract interpretation. That is, the Agreement (which includes the Warrant Certificate) should be interpreted in a manner that gives meaning to all its terms and “avoids an interpretation that would render one or more of its terms ineffective….”[^1]
[33] As well, where an inconsistency in a contract is present, as in the case at Bar, such a conflict may be reconciled by taking the parties to have intended the scope of the general terms not to extend to the specific terms.[^2]
[34] CGS therefore submits that the “at any time” language in the preamble is qualified by the language in paragraphs 4 to 7 meaning that the Warrants can be exercised at any time so long as a Liquidity Event of Additional Security Issuance has occurred. CGS also relies on the fact that there is no specific scheme for the exercise of cash Warrants and that the language in the Warrant Certificate is directed to how Warrants are exercised upon the occurrence of a triggering event.
[35] It is clear that each of the parties has a very different view of what rights exist under the Certificate. CGS’ view as expressed by Mr. Padwick in his responses to questions from the AGCO is that the Warrants just “sit there” until a triggering event occurs. This view was expressed on March 21, 2019, some six days after the Agreement was signed. Almost six months after the Agreement was signed, Mr. Ruscetta expressed a very different view in email communication with Mr. Seukeran. He was adamant that Trichome could exercise its Warrants “at any time” and viewed Trichome as a prospective 10% shareholder in CGS because of that right.
[36] Mr. Padwick’s comments on the draft on March 14, 2019 lead to significant changes to the final version, but I do not find that those changes completely negated the possibility of exercising Warrants for cash and I prefer the interpretation relied upon by Trichome for the following reasons.
[37] First, the Warrant Certificate does not need to be interpreted as an all or nothing proposition. While there is no requirement to give notice, the ability to exercise cash Warrants cannot fail on that impediment alone. Second, in terms of the negotiations leading up to the signing of the Agreement, it is clear that Mr. Padwick sought amendments which were not entirely agreed to by Mr. Ruscetta. After various versions of the Agreement went back and forth and after numerous calls, the most significant amendment related only to the rewriting of paragraph 4. Mr. Ruscetta made it clear in his emails of March 15, 2019 that “we could exercise and become a participating shareholder if there was an equity raise, then we should also have the right to become a participating shareholder if there was no raise.” Mr. Ruscetta never took any position in his emails other than the one he took at this motion, which was that Trichome could exercise its Warrants in three different scenarios: for cash, or cashless in the context of an equity raise or a share issuance.
[38] The removal of the words “at any time or from time to time” in paragraph 4 of the Warrant Certificate did not change the substantive meaning of the Certificate. That is, the right to the cash exercise of the Warrants is not determined by the fact that the triggering events were clearly defined and the manner of calculating the adjustments to the Warrants, upon a triggering event occurring, formed much of the balance of the Certificate. As Trichome correctly argues, that has nothing to do with the other “stream” of exercisable cash Warrants in the Certificate.
[39] The “preamble” to paragraph 1 of the Warrant Certificate is more than that. It is the foundation of the entire Certificate. It is not possible to simply ignore Trichome’s entitlement in that statement that they may purchase shares in CGS at any time during the relevant five-year period. One does not purchase a cashless Warrant. Further, there is no issue as to how many Warrants Trichome may exercise (11.53) or the Exercise Price ($65,000). The mathematical result is that delivery of a cheque to CGS for $749,450 would entitle Trichome to exercise its Warrants for cash.
[40] Further, paragraph 3 is not under the Cashless Warrants section and provides for a scheme to determine the value of the Warrants in certain circumstances.
[41] The Court is guided by the principles in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 SCR 633, which requires that the parties intended what is in the contract they signed and that the contract must be read as a whole. In doing so, the Court must have regard to the factual matrix in this case. The facts are that CGS needed $1,000,000 within two weeks so that it could open its retail cannabis store and it could not find a lender other than Trichome. I accept that Trichome took on risk in lending to a company and an individual who were insolvent, without assets and without any experience in running a retail cannabis operation. That risk was reflected in the interest it charged but also in its ability to exercise Warrants and gain equity in CGS in certain circumstances. The manner in which CGS suggests the Court interpret the Warrant Certificate would mean that if no triggering event occurred, Trichome would never be given the opportunity to exercise its Warrants which would expire after five years. That cannot be the intent of the Agreement or the outcome of the risk taken on by Trichome.
[42] Further, while the negotiations leading up the signing to the Agreement may be taken into account, they cannot overtake the meaning of the words used in it. If any ambiguity exists in the Certificate, it must be interpreted in a way that avoids a commercial absurdity as per Monk Development Corp. v. CVC Ardellini Investments Inc., 2019 ONSC 127, at para. 27, aff’d 2019 ONCA 811. Interpreting the Warrant Certificate in the manner suggested by CGS would mean ignoring the wording in the preamble which clearly sets out an entitlement to purchase Warrants at any time. Any attempt to interpret that provision otherwise may well lead to a commercial absurdity.
ORDERS AND COSTS
[43] Given all of the above, the Application is dismissed.
[44] The parties have agreed that the unsuccessful party would pay all inclusive costs of $45,000. As such, the Plaintiff shall pay the Defendant costs of $45,000 forthwith.
C. Gilmore, J.
Released: January 13, 2021
COURT FILE NO.: CV-19-630872-00CL
DATE: 20210113
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
C.G.S. Foods Inc.
Applicant
– and –
Trichome Financial Corp.
Respondent
JUDGMENT ON APPLICATION
C. Gilmore, J.
Released: January 13, 2021
[^1]: Richcraft Homes Ltd. v. Urbandale Corporation, 2016 ONCA 622, 406 D.L.R. (4th) 507, at para. 58.
[^2]: Fuller v. Aphria Inc., 2020 ONCA 403, para. 61.