Andy DeFrancesco’s investment company Sol faces a legal battle with the lender
Controversial Canadian dealmaker Andy DeFrancesco is in the midst of a heated legal battle with Toronto-based hedge fund MMCap Asset Management over nearly $ 550 million worth of shares in US cannabis company Verano Holdings.
The tug-of-war affects SOL Global Investments Corp. – the cannabis company founded and run by Mr DeFrancesco – and 1235 Fund LP, a subsidiary of MMCap. It culminated in both companies filing lawsuits against each other in courts in New York and Ontario.
1235 Fund Calls for Hundreds of Millions of Dollars from SOL, Mr. DeFrancesco, his wife Catherine DeFrancesco and his private equity firm Delavaco Holdings.
The dispute unfolds at a time of renewed investor interest in the cannabis sector, which has boosted pot stocks and increased stakes for both parties in the litigation by millions of shares in the newly listed Verano.
SOL holds less than 10 percent of Verano, which went public on the Canadian Stock Exchange in mid-February and is one of SOL’s most valuable assets. In the summer of 2019, SOL borrowed $ 50 million from the 1235 Fund, which is now to be repaid in the form of SOL’s Verano shares.
A lawsuit filed by SOL in New York on February 7th alleged that the 1235 Fund is attempting “a usurious windfall” in relation to a $ 50 million bond issued to SOL in July 2019. Under the loan repayment terms, he is only required to repay the principal of $ 50 million plus 6 percent interest.
But a separate lawsuit filed on February 24 by 1235 Fund accuses SOL and the loan guarantors – Mr. DeFrancesco, Ms. DeFrancesco, and Delavaco Holdings – of deliberately misinterpreting the terms. The lawsuit argues that SOL is required to hand over millions of Verano shares valued at $ 550 million in repayment for the bond.
“This lawsuit concerns the unlawful conduct of rogues in the Canadian capital markets … the defendants” [SOL] now regret their deal and are trying to break away from it instead of fulfilling their contractual and legal obligations, ”reads the 1235 Fund’s lawsuit filed in an Ontario court.
Mr DeFrancesco declined a request for comment. His New York attorney Alex Spiro of Quinn Emanuel Urquhart & Sullivan LLP said in an email that he was looking forward to the litigation and “can watch the further rise of SOL”. Lawyers representing the 1235 Fund declined to comment.
The second half of 2019 was an especially bad time for cannabis companies, both in the US and Canada. The euphoria about legalization the previous fall had subsided and signs of oversupply and low demand had begun to permeate the industry. SOL’s shares plummeted 60 percent between October 2018 and July 2019 and the company faced significant financial hardship, public filings show.
In these circumstances, SOL and 1235 Fund entered into the Notes Agreement. “SOL urgently needed cash to continue as a going concern. 1235 had what SOL needed, namely funds available to invest, ”said Ontario’s lawsuit against SOL.
For its part, the 1235 Fund was particularly interested in SOL’s large equity stake in Verano at the time, which was one of the cannabis company’s most valuable assets. Verano was due to merge with another major U.S. cannabis company, Harvest Health & Recreation, and the fund saw a huge financial uptick in the deal if it did materialize.
According to the lawsuit, the bond agreement states that if the Harvest-Verano deal is successful, 1235 Fund would receive 8.2 million shares in the resulting company in repayment for the $ 50 million loan.
More critically, if the deal didn’t go through, 1235 Fund claims that the agreement between the two parties said the fund had an opportunity to receive 1.7 million in Verano shares in repayment for the loan. The Fund claims that it was also “given the option” to receive the repayment of the loan in cash only.
Hedge funds have long played the role of providing much-needed cash to businesses with low turnover. MMCap and its affiliates often entered into this type of stocklending agreement, which also gave them the ability to sell their borrowed stocks at appropriate times.
“Though structured with a bond … when 1235 buys debt, those securities always have an upward trend in stocks,” the Ontario lawsuit stated.
In March 2020, the Harvest-Verano deal failed due to a combination of regulatory and funding problems. The fund could have technically exercised its share option in Verano shares at this point or received the loan repayment in cash, but decided against it according to the lawsuit filed by the 1235 Fund against SOL because the Verano shares appeared to be “considerably worth” less than $ 50 million. “
But then at the end of 2020 a new deal was on the table. Taking advantage of investors’ renewed interest in cannabis, Verano planned to go public on the Canadian Securities Exchange.
Still had millions in Verano stock, SOL released several press releases reminding shareholders how Verano’s public debut would add significant value to its own. According to SOL, the 1235 Fund decided to ask for Verano shares in early 2021 and threatened to invoke a “default” under the bond contract that would force SOL to repay the fund in Verano shares. That was why SOL filed a lawsuit against the fund, according to a February 16 press release.
“The defendants saw the IPO of Verano as an opportunity to extort an advantage at the expense of the plaintiffs,” says SOL’s New York lawsuit.
Mr. DeFrancesco played a central and often controversial role in many deals in the early days of the cannabis boom. He was best known in the spotlight in late December 2018 when he was accused in a short seller report of orchestrating the sale of SOL’s Latin American cannabis assets to Aphria Inc. at an inflated price.
Editor’s note: An earlier version of this article incorrectly stated that SOL holds a 20 percent equity stake in Verano. The company’s stake in Verano is less than 10 percent.
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