Business

Lawsuit Seeks Answers on Curaleaf – Grassroots Megamerger

By Hilary Corrigan Jul 23, 2020
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This story has been updated to include responses from Grassroots and Curaleaf.

Multi-state operator (MSO) Curaleaf said Thursday it had completed its approximately $700M acquisition of competitor Grassroots to create the world’s largest cannabis company. 

The close comes days after an investor lawsuit questions whether Grassroots’ leaders amended the deal to benefit themselves at investors’ expense. Plaintiffs claim they  “have a credible basis to believe” members of the Grassroots board or senior management “may have breached their fiduciary duties,” by agreeing to a buyout that undervalued the company. (Read the lawsuit here.)

With the deal, Massachusetts-based Curaleaf Holdings Inc., the largest U.S. vertically-integrated cannabis operator, expands its reach from 18 to 23 states, according to a press release. The combined company has more than 135 dispensary licenses, 88 operating dispensaries, more than 30 processing facilities and 22 cultivation sites.

The deal expands Curaleaf’s presence in  Midwest markets, according to the statement. It also announces the immediate appointment of Grassroots co-founder and CEO Mitchell Kahn to Curaleaf’s board of directors.

“This opportunity would not have come to fruition without the strength of our highly skilled executive team, who have built an impressive portfolio at an unprecedented pace, with facilities in highly competitive markets,” Kahn said in the statement about the deal.

The deal closed a week after a lawsuit by Grassroots investors alleged that the company’s leaders modified an earlier version of the deal to benefit themselves at the expense of shareholders. The companies’ statement Thursday did not disclose the final price.

But last week’s complaint says the initial deal was for $780M and the amended one valued Grassroots at $700M. Outside investors, including the plaintiffs, would have received $75M in cash with the initial deal, the suit says. Under the amended one, that $75M payout was eliminated while additional benefits went to company insiders. 

MaD Investors GRMD LLC and MaD Investors GRPA LLC filed the complaint against Grassroots last week in Delaware’s Court of Chancery. The plaintiffs said they have owned Grassroots shares since January 2019. Court records list Maryland resident Mark D. Neumann as manager of Mad Managers LLC, the managing member of the two plaintiffs.

The plaintiffs seek to inspect Grassroots’ books and records, arguing Delaware law gives them that right. They want to do so in order to investigate alleged mismanagement and possible breaches of fiduciary duty by Grassroots’ directors and officers relating to the acquisition.

Grassroots said in an email that it “has no comment on legal matters at this time.”

Curaleaf said in an email that Grassroots’ shareholders “overwhelmingly supported” the merger, with no opposition votes. “This suit was brought before the merger and requests information from Grassroots. It has no effect on the merger, which has completed.”

Undervalued?

Plaintiffs allege that in addition to undervaluing the company, “self-interested [Grassroots] insiders” failed to recuse themselves from negotiating and voting on the merger. It claims they acted “in their personal self-interest at the expense of Grassroots and its public stockholders.”

An initial merger agreement in August 2019 called for Curaleaf to acquire Grassroots in a cash and stock deal valued at $780M, according to the complaint. That included a $75M cash payment to Grassroots stockholders and the balance in Curaleaf non-voting stock. A majority of Grassroots stockholders approved the deal in September 2019.

Curaleaf sought to change the deal in February 2020, including the $75M cash payment, the complaint says. It says the merger’s renegotiated terms resulted in an amended agreement in June 2020 that reduced the price tag by $80M, eliminated the $75M cash payment, and gave Grassroots shareholders subordinate, non-voting shares of Curaleaf instead. Additionally the new terms blocked them from selling their shares until 2024, more than two years longer than the initial deal required.

The Grassroots officers who renegotiated the deal “made sure they will get paid above and beyond” the payments to Grassroots’ outside stockholders—and receive immediate access to those funds, the complaint states.

The complaint says the amended deal added payments to Grassroots CEO and director Kahn, Chief Operating Officer and director Matthew Darin and Chief Strategy Officer and director Steven Weisman. The added compensation included $9M in “special cash bonuses and ‘non-compete’ payments” not shared with other Grassroots stockholders, plus options to buy dispensaries, consult or work for Curaleaf for compensation after the deal, and additional stock and cash connected to Grassroots buying entities the directors own.

The complaint alleges the board took no steps to insulate the company’s sale from the personal conflicts of interest of the directors, who served as Grassroots’ primary negotiators for both agreements. The board allowed the three directors to lower the proceeds to outside stockholders, while increasing the consideration paid to themselves, the complaint says.

“Worse for the company”

According to the suit, on July 9 the plaintiffs demanded to inspect Grassroots’ books and records. The move followed Grassroots’ June 26 proxy statement announcing the amended merger agreement and setting a July 16 stockholder vote on it.

The plaintiffs say they have sought access to Grassroots’ records to determine the value of their stock, evaluate possible litigation and share their findings with other Grassroots stockholders. Grassroots hasn’t produced any documents, the complaint says.

Besides the “troubling manner” of the merger’s negotiation, plaintiffs say the lack of information left them unable to value their shares or determine how to vote on July 16 in connection with the merger, the complaint says.

They say the company hasn’t explained how the re-negotiation took place “and why Grassroots would agree to leave itself worse off following the re-negotiation.” With the available information, “Grassroots stockholders are unable to understand how and why Company management re-negotiated a deal worse for the Company—but better for themselves.”

The amended deal lowered the company’s value by more than 10%, it notes, for reasons that aren’t clear. The filing also complains of a lack of information about the handling and value of three dispensary permits in Illinois and of other licensed entities changing hands in the deal.

The complaint stresses Grassroots’ strength, citing a letter to stockholders earlier this year that touted a bright financial future. The company had expanded a Maryland cultivation facility, planned to expand facilities in Illinois and Pennsylvania, started developing manufacturing facilities in key states, and acquired more dispensary permits.

Plaintiffs allege the amended deal leaves the company and stockholders worse off than the initial proposal, while diverting more cash and benefits to company insiders who were in charge of negotiating the transaction. They said the company’s lack of response to their July 9 demand to inspect Grassroots’ books and records prompted the complaint at the Court of Chancery for an order compelling inspection. The complaint seeks that court order.

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