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Canada: Quebec Court Dismisses Proposed Class Action Against Cannabis Company



On January 23, 2023, the Quebec Superior Court denied leave to pursue a class action against HEXO Corp. The proposed class action raised various allegations of misrepresentation and breaches of disclosure obligations over the period of April 2018 to March 2020.1

The decision determined that the announcement of negative news followed by a decline in a public issuer’s stock price is not enough on its own to satisfy the requirements of claims for statutory misrepresentation. Arguments based on backwards reasoning with the benefit of hindsight will not meet the evidentiary burden on plaintiffs to show a reasonable possibility that the action will be resolved in their favour.

A.       Factual Background

i.        Supply Agreement

In April 2018, HEXO issued a press release announcing that it entered into a supply agreement with what became the Société québécoise du cannabis (the “SQDC“) to be the preferred supplier of cannabis products in Quebec for five years (the “Supply Agreement“). The press release stated that the Supply Agreement required SQDC to purchase 20,000 kilograms of product in the first year following the legalization of cannabis. It disclosed that the SQDC had the right to terminate the agreement under certain circumstances and included cautionary language regarding the reliance on forward-looking statements.

The company’s Management Discussion and Analysis (“MD&A“) underscored the strategic importance of its relationship with SQDC and estimated that potential revenue under the Supply Agreement could reach $1 billion.

ii.       Corporate Acquisition

In March 2019, HEXO issued another press release announcing that it would acquire Newstrike, another publicly traded cannabis company. With that acquisition, HEXO estimated its net revenues from the sale of cannabis in Canada would be more than $400 million.

The announcement included that the acquisition of Newstrike would add approximately 470,000 square feet of additional production space in Ontario’s Niagara Region and achieve annual synergies of approximately $10 million.

The day after this announcement, in a call with analysts, the company stated that 250,000 square feet of the Niagara production space was licensed and operational.

iii.      Revenue Estimates

Following the announcement of the acquisition, the company made statements about estimated revenues. For example, in the company’s MD&A dated June 12, 2019, it estimated that revenues would double in Q4 2019 because of, among other things, the Supply Agreement and the Newstrike acquisition.

iv.      String of Bad News

Over the course of the following nine months, the company issued a series of negative announcements that caused repeated drops in the company’s stock price. These announcements included:

  • The company was withdrawing its revenue guidance of $400 million and was right-sizing its operations, including winding down operations at the Niagara facility acquired from Newstrike.
  • “Block B” of the Niagara facility (approximately 17 per cent of the facility) was discovered as not being adequately licensed. Cultivation and production activities in the unlicensed space were immediately stopped. The company subsequently announced it would sell the Niagara facility.
  • HEXO’s Q4 2019 financial results were approximately 40 per cent lower than forecasted.
  • HEXO recorded three separate impairments on inventory in the range of $265 – $280 million. The company identified material weaknesses in its internal controls of its financial reporting in various areas including its year-end inventory count.
  • SQDC failed to purchase its 20,000-kilogram commitment under the Supply Agreement in the first year and HEXO was not going to enforce this commitment because of its overall business relationship with the SQDC and its position in the Quebec market.

B.       Alleged Misrepresentations

Owing to the decline in the company’s stock price, the plaintiff sought authorization to institute a secondary market claim against HEXO, filed under the Quebec Securities Act, and further sought leave to pursue a class action against the company for damages arising from statutory and civil misrepresentations.

The plaintiff alleged HEXO misrepresented that:

1. The Supply Agreement guaranteed revenues associated with the sale of 20,000 kilograms of cannabis in the first year;

2. The acquisition of Newstrike:

a. included fully licensed and operational facilities;

b. would generate more than $10 million in annual synergies;

c. along with the Supply Agreement, would result in the doubling of HEXO’s net revenue between Q2 and Q4 in 2019;

3. HEXO would achieve revenue of greater than $400 million for the 2020 fiscal year;

4. HEXO’s inventories were accurate and its internal controls were effective.

C.       Why the Suit Failed

i.        Supply Agreement

The Court disagreed that HEXO’s statements regarding the SQDC’s purchase commitment of 20,000 kilograms of cannabis amounted to a “guarantee” of first-year revenue under the Supply Agreement. The impugned statements were found to simply provide a description of the SQDC’s purchase commitment in the first year under the Supply Agreement. The Court expressly commented that courts do not make assessment with the benefit of hindsight. The fact that the SQDC did not fulfil its first-year purchase commitment or that the defendants decided not to enforce the take-or-pay feature are not evidence that the public statements were untrue or misleading at the time they were made.

The Court reached its decision after considering these factors, which effectively qualified the alleged misrepresentation:

(i)    HEXO disclosed that the SQDC could terminate the Supply Agreement under certain circumstances rebutting any notion of guaranteed sales;

(ii)   HEXO’s statements about “strong business certainty through Year 1 post-legalization” referenced several factors and not just the SQDC’s commitment under the Supply Agreement;

(iii) HEXO’s press release contained cautionary language that forward-looking statements “should not be read as assurances of future performance or results”; and

(iv) the plaintiff was aware that this was a “new and volatile market.”

ii.        Newstrike Acquisition

Although the plaintiff alleged HEXO misrepresented the Niagara facilities were fully licensed and operational since March 2019, the plaintiff’s evidence demonstrated that the licensing deficiency only became known around July 30, 2019, which is when HEXO disclosed they were made aware of the deficiencies.

In respect of the impugned statements that operations at the Niagara facility would be licensed for cannabis production, HEXO announced on October 24, 2019, it had temporarily suspended its operations at the Niagara facility as part of cost-cutting measures. Hence, the fact that one section of the facility was not adequately licensed could not reasonably be expected to have any impact after October 24 on an investor’s decision to buy or sell HEXO securities.

The Court further noted that the mere fact that projected synergies failed to be realized was not evidence that the impugned statements were misrepresentations of material facts at the time they were made. In any event, HEXO clearly disclosed the risk that the synergies may not be achieved so that investors would not rely on the projections.

As for the fact that HEXO’s Q4 revenues were lower than forecasted and the lowering of HEXO’s financial guidance, the documents in question contained the assumptions underlying the forecasts and cautionary language that specifically warned readers that projections are not guarantees of future performance or results.

iii.        Impairment Loss on Inventory and Internal Controls

In terms of the impairment loss on inventory, the Court found that the plaintiff failed to link any of the subsequent disclosures on impairment to a previous misrepresentation of a material fact at the time the statement was made. Although there was a restatement of certain financial statements, the Court accepted that the impairment loss was due to subsequent events and new and available third-party information about circumstances surrounding the ongoing development of cannabis use.

The plaintiff also failed to establish that the impairment disclosure concerned a material fact. The Court found the plaintiff failed to lead evidence that ties the decline in HEXO’s share price to the disclosure of the adjustments to the impairment loss on inventory.

The Court further determined that the plaintiff failed to identify any HEXO public statements which contain alleged misrepresentations regarding its internal controls. The company disclosed in October 2018 that it was implementing a new enterprise resource planning system and cautioned that the related design and testing process could result in errors and/or inaccurate information for management and financial reporting.

D.       Conclusion

The Court’s decision demonstrates that courts will look deeper than simply pointing to a negative news release and corresponding stock price drop to demonstrate reasonable probability of success for leave to bring a statutory, secondary market claim for misrepresentation. The decision also highlights the importance of using robust safe harbour language for forward-looking statements and risk disclosures in MD&As.


1. Dionne c. Hexo Corp., 2023 QCCS 162 (CanLII)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.–hemp/1278752/quebec-court-dismisses-proposed-class-action-against-cannabis-company?email_access=on

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Driving Under the Influence of Marijuana




No national standard exists to determine how long someone should wait to drive after consuming marijuana. However, experts at the Colorado Department of Public Health and Environment recommend waiting at least six hours after smoking less than 35 milligrams of THC and eight hours after eating or drinking something containing less than 18 milligrams.

For reference, a “typical” marijuana cigarette contains at least 60 milligrams of THC, and most edibles contain around 10 milligrams per serving size. A 12-hour wait is safer, as the high (and subsequent drowsiness) from smoking a typical amount lasts far longer.

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How can it help distressed cannabis companies today?




Without the option to declare bankruptcy—due to federal illegality—the only recourse for cannabis businesses in distress to become solvent and / or distribute assets to creditors is to enter into an expensive and difficult judicial cannabis receivership. Receiverships are inherently adversarial, and the required input from third-party experts, lawyers and regular engagement with the courts can be incredibly costly.

Meanwhile, businesses operating in mainstream sectors have the ability to declare bankruptcy. This is also a court-ordered procedure that allows companies to satisfy lenders by liquidating assets, restructuring operations and finances, and to enjoy a break of sorts to make deals with creditors and renegotiate contracts and leases. Without a change to federal banking laws, cannabis companies are blocked from the benefits of bankruptcy, and the situation is only getting worse.

Given the current tight capital market environment, the increase in cannabis distressed assets, and the shortage of options to cannabis operators to address said challenges, is there a possible alternative option to alleviate the rather dire situation?


Genesis—Transition from Equity Financing to Debt Financing

Equity financing has been the most prominent way to raise capital in cannabis for the last several years. However,recent data collected by Viridian Capital Advisorsreveals that debt currently makes up 93% of capital raised by U.S. cannabis cultivation and retail companies, compared to 55.7% in U.S. industries overall.

This change in the capital-raising environment, which has led to an increased number of creditors in the sector, combined with continued market pressures on cannabis businesses to remain competitive, make it highly likely that the industry will inevitably see more receiverships.

Ultimately, while debt financiers are willing to lend cannabis businesses money, they expect to be paid back on time and often with high interest. If the business begins to struggle and enters a distressed phase that leads to receivership, the business assets will be sold off and the secured lenders will be the first to get paid, while the business itself is likely not to recover much.

Consider an Administrative and Collateral Agent

With receiverships punishingly expensive and the debt financing landscapebordering on predatorial, distressed cannabis businesses are desperate for any assistance or support available.  An Administrative and Collateral Agent (ACA) could be the alternative support required, benefitting borrowers, lenders and regulators alike, and offering a more cost-effective and less punitive option to courts, receivers and lawyers.

Instead of dealing with the courts and an expensive court-appointed receiver, cannabis companies seeking relief could turn to an ACA to facilitate mediation between parties and create alignment within the industry, which does not exist today.

An ACA could create a level of trust, transparency and complementary positioning with industry participants that simply has not yet existed in cannabis. The use of an ACA could challenge the competing perceptions that there is already alignment between regulators, operators and lenders, or that a useful alignment between these parties could ever exist.

An ACA could be a real and valuable tool for state governments and regulators as they begin to understand that it is in their best interests to assist cannabis businesses in their states in the face of continued federal illegality and restrictions. Under a private agreement between parties, the ACA would conduct something more akin to an administrative receivership as opposed to the traditional judicial receivership that is the only current option for insolvent cannabis businesses to seek relief.

Building upon a Cannabis Credit Rating Framework

Ideally, an ACA would work within an industry-specific credit rating system for cannabis businesses in distress in order to work within an established framework for potential investors. If cannabis companies are ranked across an equitable, systematic and formulaiccredit rating system, borrowers, lenders and regulators would benefit from the quantifiable transparency afforded by said rating, and debt financing would have an inherent regulatory-like structure to prevent predatory lending. By avoiding the courts, the distressed cannabis company would save time, money and create a more attractive scenario for potential lenders.

Initial Path to Mitigating Solutions

While the current challenges facing cannabis businesses today are well documented and have risen to both creditors and regulators attention, a viable solution has yet to be identified. Most likely no one solution exists beyond waiting for the economic and capital environments to evolve. Yet, mitigating options do exist.

The introduction of an ACA is one such option. Questions remain as to the mechanics, regulatory, operative and fiscal alike, as well as who to trust to take it on. The introduction of a credit rating framework is the first step to creating a solid foundation from within which an ACA can operate transparently and equitably. Any potential buy-in from regulators, creditors and operators remains an open question.

All of that said, there is today an unprecedented set of market forces that is pushing all cannabis stakeholders to think outside of the box. The still growing opportunities in the cannabis industry, the will of operators to survive and succeed, as well as the increasing exposure from creditors, all point to not only an acceptance for the need of an alternative, but to the drive to do things differently.

Is your cannabis business in distress? Would you benefit from expert guidance and support in deciding on whether to enter into a receivership?Reach out to United CMC today.

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United States: Alex Malyshev And Melinda Fellner Discuss The Intersection Of Tax And Cannabis In New Video Series – Part VI: Licensing (Video)




Carter Ledyard is pleased to announce the launch of our short-video series on the cannabis industry focusing on business and legal issues for those companies and entities interested in doing business in New York.

This series offers a perspective on tax policy and specific statutes affecting cannabis businesses today. Our cannabis shorts are a great way to get to know our professionals, Alex Malyshev and Melinda Fellner, in quick and easy to watch clips, packed with the salient information you need.

In Part VI of our series, Alex and Melinda discuss licensing for cannabis businesses in New York. Watch below!


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