A court document in the possession of the Cannabis Law Report describes an escalating battle between investment firm Sol Global (SOLCF) and the buyer of the company's $50 million debenture, the Canadian hedge fund MMCap over shares in the cannabis company Verano Holdings (VRNOF) . The dispute is regarding the repayment of the debenture Sol Global sold to MMCap in July 2019 through what's called the 1235 Fund.
The dispute could affect the decision many investors made recently that bought shares in Sol Global based on the company's ownership of Verano shares. Twitter posts and articles in support of buying the stock based on a sum of the parts analysis counted the Verano shares as part of the Sol assets, but that may not be the case.
According to the new court document filed in Canada, MMCap wants its repayment in the form of those Verano shares. It is insisting that it has the option to request payment in shares, which could be worth as much as $500 million. Sol Global preemptively filed a lawsuit in New York saying that MMCap did not have the option to choose Verano shares as a form of repayment and that it would instead pay the debenture amount in cash. There's a lot to unpack here, so let's start with the debenture.
The case is 1235 Fund LP versus Sol Global Investments, Verano Blocker 2, Andy Defrancesco, Catherine Defrancesco, and Delavaco Holdings in both Florida and Ontario.
Sol Global was in a cash crunch back in July 2019 and was listed as a going concern in its securities filings. The one thing of potential value it owned was a large investment in the privately-held cannabis company Verano. MMCap bought the debenture through what was called the 1235 Fund giving Sol $50 million with the risk that Sol could possibly go under and not repay the $50 million or the Verano shares could end up being worth much less than the $50 million it had spent. At the time, it was a risky deal as it was difficult to determine the outcome. Cannabis stocks were suffering through a tremendous bear market and valuations had plunged across the board. Capital was tight and several major companies were struggling.
Harvest Health and Verano
Harvest Health & Recreation (HRVSF) had said it was going to acquire Verano in a deal valued at $850 million, but then Harvest shares tumbled and the deal unraveled. Both parties agreed to terminate it and walk away. This is where the disagreement begins between Sol and MMCap. Sol claims that once the Harvest deal was over, that MMCap had no options to receive the stock as payment, and that MMCap could only get a cash payment.
MMCap says that isn't true and even includes in its lawsuit the language from the debenture document that seems to support its claim to having an equity option. The debenture language according to MMCap says that if the Harvest deal didn't happen, MMCap would receive 1,730,794 shares of Verano. MMCap says that the termination of the Harvest deal actually had the opposite effect to what Sol claims. Instead of getting paid in cash, the debenture language says that the termination of the deal meant MMCap would have to accept the Verano shares as payment. At that time, Sol would have been able to walk away from the $50 million debenture by only having to turn over the shares which looked to be worth far less than they are today. MMCap also says in its lawsuit that Sol wasn't paying its interest payments on time and could only pay what it owed in tranches.
MMCap also alleges that Sol sold some of its Verano shares, which it wasn't supposed to because the shares were tied to the debenture. Sol held the shares of Verano in two separate companies for tax purposes called Verano Blocker 1 and Verano Blocker 2. The shares in Blocker 1 were sold according to the court documents.
MMCap also complains that Sol said in its financial statements in October 2020 that MMCap would have to accept a cash payment for its debentures since the Harvest deal fell through. However, in previous financial statements, Sol made no such claim. MMCap alleges that Sol was misleading investors by making this claim.
The stakes increased in November 2020 when Verano and AltMed struck a deal. At that time, Sol issued press releases stating that such a deal would significantly impact Sol in a positive way, but failed to mention the MMCap potential right to the Verano shares. MMCap said it immediately contacted Sol about what it considered to be a misleading statement but that the statements continued.
MMCap also believes the New York lawsuit is in error and shouldn't be filed in the state because all the parties list Canada as their addresses.
New Verano Shares
When Verano and AltMed combined, it resulted in what was considered "New" Verano shares. Shareholders of the old shares must agree to accept the new shares. The court document says that Sol wanted to get MMCap's approval in order to make the share exchange because MMCap had a security interest over the Verano shares in the Blocker 2 account (due to the debenture repayment), but also that MMCap was giving up those shares. MMCap said no and refused.
On February 5, MMCap said it requested its Verano shares from Sol and instead learned that Sol had exchanged the old shares for the new Verano shares despite MMCap requesting to turn over the shares. MMCap is complaining that Sol is in default for the debenture repayment and that since it hasn't turned over the Verano shares that according to the debenture documents, it will now owe even more Verano shares to MMCap. MMCap is now asking for 2,163,493 shares of Verano.
What Investors Believe
Numerous investors have been touting the Verano shares held by Sol as a reason to own the stock. Many had published "sum of the parts' analysis with no mention that Sol might owe these shares to someone else because Sol was insisting it owned the shares outright. These investors may be upset when they see the debenture language included in the court filing by MMCap and 1235 Fund. It seems pretty specific, whereas the case filed in New York by Defrancesco lacks specificity. If the court awards the shares to MMCap that would certainly negatively affect Sol Global.