Court File and Parties

COURT FILE NO.: CV-22-689631-00CL DATE: 20230210 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, C. C-36, AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF CANNAPIECE GROUP INC., CANNAPIECE CORP., CANADIAN CRAFT GROWERS CORP., 2666222 ONTARIO LTD., 2580385 ONTARIO INC. AND 2669673 ONTARIO INC.

BEFORE: Osborne J.

COUNSEL: David S. Ward, Monica Faheim and Sam Massie, for the Applicants Clifton Prophet, and Heather Fisher, for 2125028 Ontario Inc. Rory McGovern, Cardinal Advisory Services Ltd. Lisa Corne, for the Purchaser

HEARD: February 10, 2023

Endorsement

JUSTICE OSBORNE:

[1] The Applicants seek an approval and vesting order approving the amended and restated Share Purchase Agreement (“SPA”), authorizing and directing the Applicants to perform and complete the SPA, transferring to and vesting in a new entity those Excluded Assets, Contracts, and Liabilities, and vesting in the Purchaser ownership of the Purchased Shares.

[2] The motion for approval of an earlier share purchase agreement was before me on January 31, 2023 and I decided to approve the transaction and the related vesting order for the reasons set out in my Endorsement of February 2, 2023. Defined terms in this Endorsement have the meaning given to them in my Endorsement of February 2, and/or the motion materials in respect of the January 30 motion, today’s motion and the Second Report and Supplementary Report of the Monitor.

[3] On January 30, the relief sought by the Applicants was opposed by one of the senior secured creditors, 212. The parties have in the interim period continued discussions and negotiations, resulting in an amended transaction which is reflected in the SPA for which approval is sought today.

[4] Accordingly, none of the relief sought by the Applicants today is opposed, and it is supported and recommended by all parties who appeared in Court to make submissions today, including but not limited to Cardinal, 212, Marzilli and the Monitor. I observe that the Lawyer’s Certificate of Service from counsel to the Monitor confirms that the Service List was served.

[5] The Service List was also served with the motion materials in respect of the January 31 motion, at which time the only party in opposition was 212. As noted above, that opposition has now been withdrawn.

[6] In the circumstances, I will not repeat all of the facts informing the background to and context for the motion before me today, as they are set out more fully in my Endorsement of February 2.

[7] The SISP was conducted according to the order of Justice Penny made earlier in this proceeding, and overseen by the Monitor with the assistance of the Sales Agent, in consultation with the Applicants. Cardinal acted as a stalking horse bidder to provide a baseline in the process. Ultimately, the Marzilli Bid was the only Qualified Bid received notwithstanding that 83 parties were invited to participate in the process, 14 of which signed non-disclosure agreements.

[8] The SPA before me today provides for the assumption by the Purchaser of the liabilities of the Applicants to both 212 and Marzilli, and those parties are the two senior secured creditors – each in first position: 212 as to the Equipment Collateral only and Marzilli as to, effectively, all other assets of the Applicants.

[9] The primary benefit of the proposed transaction reflected in the Spa is the seamless continuity of business operations, which in turn ensures the structure of operations, importantly maintains the current cannabis licenses, and preserves economic activity including customer and supply arrangements. Importantly, the Purchaser is assuming approximately 95% of the 150 employees and the preservation of those jobs is important.

[10] The key cannabis licences include the standard processing and sale licence in respect of cannabis for medical purposes as well as the license issued by the CRA under the excise duty framework. Those are critical to the continued operation of the business.

[11] Fundamentally, the proposed transaction achieves the purpose of this CCAA proceeding. Indeed, it ensures that the business emerges in a form stronger than it was prior to filing, and in a manner that preserves enterprise value and employment for as many employees as is reasonably possible. The business will continue, post-closing, as a going concern.

[12] The SISP process was robust, yet yielded only one Qualified Bid, reflective of the challenging circumstances in which the cannabis sector generally finds itself at present.

[13] I am satisfied that the transaction reflected in the SPA represents the best outcome for all stakeholders in very challenging circumstances.

[14] As is clear from my Endorsement of the February 2, the motion materials and as I have noted above, the relief is in the form of a reverse vesting order (“RVO”). Effectively, the Purchaser becomes the sole shareholder of the debtor company, which retains its assets including key contracts and licences, and those liabilities not assumed by the Purchaser are vested out and transferred, together with any excluded assets, into a newly incorporated entity referred to as Residualco.

[15] This Court has jurisdiction to approve the transaction, including an RVO, as part of its general jurisdiction found in section 11 of the CCAA. (See Just Energy Group Inc. et al, 2022 ONSC 6354 at para. 27 and Re Harte Gold Corp., 2022 ONSC 653 at paras. 31-32)

[16] While, as those authorities noted above make clear, RVOs should not be the norm, they can be approved where the circumstances justify such a structure. As noted by Justice McEwen in Just Energy, the Court should be satisfied that the RVO was prima facie appropriate for use in the case at hand and that the factors set out in section 36 of the CCAA as informed by the Soundair Principles (Royal Bank of Canada v. Soundair Corp., [1991] 4 O.R. (3d) 1), are met.

[17] Further, the factors set out by Justice Penny in Harte Gold provide a useful framework within which to determine whether an RVO should be approved.

[18] Considering all of those factors, I am satisfied that the relief sought today should be granted for the reasons set out above, including but not limited to the fact that the relief is unopposed by any stakeholder, strongly supported by the two senior secured creditors and strongly recommended by the Monitor.

[19] Simply put, there is no other reasonable alternative, and the relief sought provides for the continued operation of the business as a going concern and, critically, the continuation of the required cannabis licences. As observed by the Monitor, the transaction will be materially more beneficial to creditors and other stakeholders than would a bankruptcy. The section 36 factors, the Soundair Principles, and the factors applicable to proposed approval of an RVO, are all satisfied here.

[20] For the same reasons, and as part of the approval of the transaction, I am also satisfied that the ancillary relief sought today should be granted. None of that ancillary relief is opposed, and all of it is supported by the senior secured creditors and strongly recommended by the Monitor.

[21] Adding Residualco as an Applicant, authorizing the Monitor to distribute the Deposit Repayment and granting the Monitor certain enhanced powers and extending the stay are all appropriate in the circumstances.

[22] As part of the transaction, the Applicants seek third-party releases. I am satisfied that all of the parties in respect of which releases are sought were necessary to the restructuring of the Applicants; the claims to be released are rationally connected to the purpose of the restructuring and necessary for it; the restructuring could not succeed without the releases; the parties being released contributed to the restructuring; and the releases benefit the debtors as well as the creditors generally. (See Blackrock Metals Inc., 2022 QCCS 2828 at para. 128, Just Energy, supra at para. 67 and Green Relief Inc. (Re), 2020 ONSC 6837 at para. 23-29).

[23] In particular, I observe that Cardinal, which acted as the stalking horse bidder in the SISP, is proposed to be released. While it may not be appropriate in every case (or indeed in many cases) to approve a third-party release to a stalking horse bidder since, among other things, that party is typically compensated for the risk it undertook and the cost of its proposed offer by the terms of a stalking horse agreement, I am satisfied that in this particular case, the relief should be granted.

[24] Cardinal acted as more than a stalking horse bidder, and indeed its provision of the interim financing permitted the Applicants to continue as a going concern, “keep the lights on”, and thereby preserve the value of the business as a going concern which is the underpinning of the ability of the business to emerge as a going concern in the first place.

[25] Moreover, Cardinal agreed to waive, as part of the negotiations leading to the amended SPA for which approval is sought today and which resulted in there being no opposition, its break fee and professional fees to which it otherwise would have been entitled pursuant to the terms of the stalking horse agreement. This was part of the matrix of consideration flowing between and among the various affected stakeholders resulting in the revised SPA and the consensus achieved today.

[26] Finally, both senior secured creditors support the release, and the Monitor strongly recommends it, in large part for the reasons I have set out above. In the circumstances, I am satisfied that it is appropriate.

[27] The Monitor’s activities as reflected in the Second Report and Supplementary Report are appropriate, are unopposed and are approved.

[28] The stay period is extended to including March 17, 2023 to give the Applicants sufficient time following the closing of the transaction reflected in the SPA to complete post-closing matters.

[29] Both orders (approval and vesting order and ancillary order) to go in the form signed by me today. The orders are effective immediately and without the necessity of issuing and entering.

[30] I am grateful to all of the parties and their counsel for their cooperation and compromise which has resulted in the unopposed motion for approval SPA today.

Osborne J. Date: February 10, 2023