Ontario Court of Appeal dismisses $350,000 claim for failed cannabis company acquisition

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Court-appointed seller not aware license expired shortly after deal signed

The Ontario Court of Appeal has dismissed the claim of TS Pharmaceuticals against a court-appointed receiver for failing to prevent a cannabis license from expiring, resulting in a failed deal and $350,000 in damages.

In 2056706 Ontario Inc. v. Pure Global Cannabis Inc., 2022 ONCA 381, TS Pharmaceuticals Ltd. entered into an agreement to purchase the assets and shares of PureSinse Inc. from A. Farber & Partners Inc., a court-appointed receiver. PureSinse was a cannabis manufacturing company licensed by Health Canada.

The parties signed an asset purchase agreement (APA) and a share purchase agreement (SPA). However, PureSinse’s license had expired five days after the parties sealed the deal. At the time the parties entered into the agreement, the court did not allow the receiver to possess or control some assets, including the cannabis license. The license remained in the possession of the debtor and, as a result, the receiver and TS were not aware that the license was about to expire when they executed the SPA.

The receiver only learned of the expiration of the cannabis license almost two weeks after the agreement was signed, and the information was immediately conveyed to TS. PureSinse could not carry on its cannabis business without the license. Consequently, the SPA was terminated.

The APA required each party to negotiate the SPA in good faith and to use “best efforts” to complete the share purchase transaction.  TS asserted that the receiver failed to perform its obligations under the agreement, so it sought $350,000 in damages. TS argued that the receiver had an obligation to prevent the lapse of the cannabis license.

The motion judge dismissed the claim, finding that the receiver had no positive obligation to keep the license in good standing because the receiver had no authority over the license or the power to direct the appointment of a responsible person in charge of the cannabis assets or the transfer of the license.

The Court of Appeal agreed with the motion judge. The court said that a trial court’s interpretation of a negotiated contract is reviewed on a standard of palpable and overriding error, absent a “rare” extricable question of law.

In this case, the court did not find any palpable and overriding error in the motion judge’s decision that the receiver had indeed complied with its obligation to use its best efforts to negotiate the SPA.

“There was no evidence that the receiver could have done anything in the one business day between the execution of the SPA and the expiry of the license to renew or forestall its expiry, even if had the authority to do so,” the court said in dismissing the appeal.

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