Canadian dealmaker Andy DeFrancesco and Toronto-based hedge fund MMCap Asset Management have reached a settlement in a six-month legal battle involving hundreds of millions of dollars worth of shares of Verano Holdings, an American cannabis company.
The agreement will see Mr. DeFrancesco’s holding company, Sol Global Investments Corp. pay 1235 Fund LP – an affiliate of MMCap – $120-million in cash to settle a $50-million loan that Sol had taken out from the hedge fund more than two years ago. The loan was in the form of the non-convertible debenture.
The settlement structure is complex - instead of directly paying 1235 Fund the $120-million in cash, a subsidiary of Sol will acquire all of 1235 Fund’s rights to the disputed $50-million debenture, and will fund that acquisition by taking out a loan from an unnamed private lender.
“SOL Global is pleased that the litigation is at an end,” Mr. DeFrancesco said in a press release.
He added that Sol decided to take out a loan to pay for the settlement instead of using its own assets because there was “significant upside” in preserving the company’s own holdings. That loan will have a term of 12 months and an interest rate of 9 per cent.
The terms of the settlement are “mutually acceptable,” according to an unnamed 1235 Fund executive quoted in the press release.
The entities involved in the legal dispute – Mr. DeFrancesco, his holding company Sol, and MMCap – were all previously beneficiaries of the booming legal cannabis industry. Sol was founded mainly to invest in both American and Canadian cannabis firms, and quickly accumulated assets – including stock of Verano – in the months leading up to legalization in mid-2018.
Cannabis companies often relied on individual high-net-worth investors, private family offices and hedge funds like MMCap for funding. Traditional sources of credit were scarce because cannabis was illegal federally in the U.S. and the initial reluctance of Canadian banks to get fully involved in what was seen as a controversial industry.
A lawsuit filed by Sol in February in New York alleged that 1235 Fund was attempting to “extort a usurious windfall” from Sol in relation to the repayment terms of the non-convertible debenture. Sol claimed it was only obligated to pay back $50-million plus an interest of 6 per cent to the hedge fund.
But a separate lawsuit filed by 1235 Fund weeks later alleged that Sol and the guarantors of the loan – Mr. DeFrancesco, his ex-wife Catherine DeFrancesco and a private equity firm belonging to him, Delavaco Holdings – had deliberately misinterpreted the terms of the debenture. In fact, the 1235 Fund suit said the debenture deal required Sol and the guarantors to hand over 2.1 million shares, even though they had ballooned in value to more than $500-million by the time repayment was required.
That lawsuit also suggests that 1235 Fund was interested in lending Sol money to begin with only because of its significant stake in Verano, which, back in mid-2019, was poised to be acquired by another large cannabis company, Harvest Health & Recreation.
Notably, the settlement between the two companies does not involve the exchange of Verano stock, even though it was at the centre of the dispute. Verano became a public company on the Canadian Securities Exchange in February, 2021, after the deal with Harvest fell through owing to various regulatory issues. The value of Verano’s stock has since plunged by more than 40 per cent since listing.
Company filings state that as of May 31, 2021, the value of Sol’s investment in Verano was approximately $303.8-million. Its initial investment in Verano back in October, 2018, according to filings, was worth $114.8-million.
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