A licence suspension that stripped CannTrust Holdings Inc. of its ability to grow and sell cannabis is raising new questions about whether the company remains a viable takeover target, and how Health Canada would handle such a transaction.
The Vaughan-Ont.-based company announced Tuesday that the suspension will only allow it to cultivate and harvest existing plants and perform ancillary activities such as trimming, drying and milling on those plants.
It cannot propagate new plants, and its “licenses for standard processing, medical sales, cannabis drugs and research issued under the Cannabis regulations” were fully suspended.
The licence suspensions are an obvious blow to the company’s day-to-day operations but may also result in a loss of interest from potential suitors looking to pick up the company, or some of its assets, at a discount.
The main concern a prospective buyer should have at this point, experts agreed, is that they’d be entering new territory because of Health Canada’s influence.
According to Trina Fraser, a cannabis lawyer with Brazeau Seller Law, any share purchase acquisition would have to be approved by Health Canada and a buyer would take on any future liabilities — including those in retaliation for actions that occurred under previous management team, regardless of whether they have yet been made public. In this event, Health Canada might not even be a buyer’s sole concern, she said.
“There could be all sorts of other liabilities out there lingering in the shadows that would stick to you if you’re buying shares of a company,” Fraser said. “You’re buying everything; you’re buying warts and all.”
Fraser, who also works in acquisitions, finds it difficult to see value for a buyer in a share transaction. Should one take place, as is the case with every takeover in the cannabis sector, a change of key investors attached to a licence must be reported to Health Canada and would “probably trigger security clearance requirements,” that would require further alterations to be made to the licence, she said.
This type of acquisition would only made, she said, if the licences could be preserved and that would require a buyer coming to an agreement with Health Canada — either a conditional one that’s only ratified after the investigations the regulator is conducting are wrapped or one that doesn’t make the buyer responsible for any new damages.
An acquisition of CannTrust’s assets is likely more appealing, but even then, Health Canada would still be closely involved in the process, she said.
A potential buyer might be interested in acquiring CannTrust’s genetic material — new strains of cannabis and cultivars — but it’s unclear to Fraser where the licence suspension would ban the company from being able to sell these assets to a licensed producer. Should they be interested in CannTrust’s greenhouses, the purchaser would have to acquire a new licence for the facilities under its own name. Even buying some of the machinery in CannTrust’s facilities could cause headaches and force a buyer to amend a licence for the particular room in their own facilities in which they are planning to use it.
“No matter how you look at it, Health Canada is going to be involved,” she said.
Health Canada did not immediately offer comment on its potential role in a takeover.