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| 2 minutes read

Traditional deal terms in Cannabis M&A

One of the features of doing business in the cannabis industry is adjusting the business model to account for constantly-shifting winds. One example of this is the recent announcement by Green Growth Brands Inc. that it would be selling its CBD business to BRN Group, Inc. (link) which itself was started by certain founders of Green Growth Brands (link). Green Growth stated in its press release (link) that this move was to focus on its non-hemp cannabis business, divesting the part of the business that included sales of CBD products in mall kiosks and national CPG retailers, although the release notes that Green Growth would retain a “carried interest” in the CBD business.

The announcement of this transaction highlights a couple of features of mergers & acquisitions. First and foremost, the buyer here is a “stalking horse”, an equine-referencing term used to describe a buyer that has been arranged in advance of a formal sale process (e.g., an auction). This is driven in part because, under US corporate laws, the board of directors of a company has various fiduciary duties to shareholders, one of which is to maximize value to the shareholders in the sale of a business (although I am grossly oversimplifying what that means for the sake of readability). So, a company will typically negotiate with one buyer, so that there is a deal in hand, and then go out and actively market the company (or, in this case, a division) for sale during a “go shop” period (say, 30 days). If other buyers emerge, they will typically have to offer a “topping bid”, which, at a minimum, will cover a the negotiated “breakup fee” that the seller will have to pay the stalking horse for taking the second bid.

Second, this transaction has the seller retaining a “carried interest” in the CBD business. Although the press release does not detail the terms, I would speculate this means that the seller is keeping a piece of the upside - the holder of a carried interest typically gets a portion of the profits over an agreed-upon valuation. This is similar to a stock option struck at a specific exercise price, and could also be thought of as another form of earn-out. In other words, this is a way for a seller to retain some value if the buyer is able to do more with the assets.

These features of the Green Growth transaction – a stalking horse bid, a go-shop period, and a seller interest in the upside - are all fairly typical for M&A transactions. We will likely continue to see industry companies utilizing traditional M&A tools to get deals done.



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