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Tilray downstream merger suit can continue, Chancery Court says

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A worker checks cannabis plants inside the Tilray factory hothouse in Cantanhede, Portugal April 24, 2019. REUTERS/Rafael Marchante

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  • Follows Tilray and Privateer Holding's 2019 downstream merger
  • Derivative suit survives motions to dismiss

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(Reuters) - A group of investors can proceed with a lawsuit accusing Canadian cannabis company Tilray Inc and the founders of its former parent company, Privateer Holdings Inc, of completing a downstream merger at the expense of Tilray’s minority investors, the Delaware Chancery Court has ruled.

Chancellor Kathaleen McCormick said on Tuesday that the plaintiffs had adequately alleged that Privateer's founders indirectly controlled Tilray and had executed the downstream merger to obtain tax benefits without properly compensating the investors.

Attorneys for the investors, Tilray, Privateer and the Privateer founders did not immediately respond to requests for comment Wednesday. Representatives for Tilray and Privateer also did not respond to requests for comment.

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Brendan Kennedy, Christian Groh and Michael Blue quit their jobs in 2010 to launch Privateer, a private equity firm focused on cannabis investments. The firm later launched Tilray, which went public in 2018.

Quoting lyrics from the Grateful Dead’s “Keep Your Day Job,” McCormick said that the trio ignored the advice to “keep (your day job) on ice while you’re lining up your long shot.”

The transaction at the heart of Tuesday’s opinion, a downstream merger, took place in 2019. Tilray canceled the stock the private equity firm owned in the cannabis company and then reissued the stock directly to Privateer’s investors.

Tilray investors subsequently sued Tilray, Privateer and its founders, claiming the founders had used the reorganization to obtain tax benefits without adequately compensating the cannabis company’s minority investors.

That suit was later consolidated with a March 2020 proposed class and derivative action.

The defendants moved to dismiss the suit, claiming the investors had failed to properly allege that the founders controlled Tilray and that the downstream merger amounted to "self-dealing."

In denying the motion, the judge said the investors had adequately alleged that Privateer's founders controlled Privateer and indirectly controlled Tilray.

McCormick said that the investors claims made it "reasonably conceivable" that Privateer's founders had the shared goal of using the transaction to avoid "massive" tax liabilities.

The judge said that the minority investors were entitled to a fairness review of the transaction because the founders had received a unique benefit from the deal.

The case is In Re Tilray Inc Reorganization Litigation, Chancery Court of Delaware, No. 2020-0137.

For the investors: Peter Andrews of Andrews & Springer; Gregory Varallo and Mark Lebovitch of Bernstein Litowitz Berger & Grossmann; Jeffrey Gorris of Friedlander & Gorris; and D. Seamus Kaskela of Kaskela Law

For Kennedy and Privateer Evolution: Michael Kelly of McCarter & English

For Groh and Blue: Carl Kunz of Morris James; and Ronald Berenstain of Perkins Coie

For Greenwood: Susan Waesco of Morris, Nichols, Arsht & Tunnell

For Auerbach: Blake Rohrbacher of Richards, Layton & Finger.

Read more: Canadian cannabis company Tilray soars in Nasdaq debut

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Our Standards: The Thomson Reuters Trust Principles.

Sierra Jackson reports on legal matters in major mergers and acquisitions, including deal work, litigation and regulatory changes. Reach her at sierra.jackson@thomsonreuters.com

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