Acreage Holdings, Inc. – s. 9.1 of National Instrument 61-101 Protection of Minority Security Holders in Special Transactions

May 17, 2019

Order

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions – application for relief from requirement to obtain separate minority approval for each of filer's subordinate voting shares and proportionate voting share – classes intended to be identical, but for proportionate rights – no difference of interest between holders of each class of shares in connection with the proposed business combination transaction, different class are not affected in a differing – safeguards include independent committee, fairness opinions – applicable corporate statue and filer's constating documents provide that shareholders will vote as a single class other than in certain circumstances which are not present in connection with proposed transaction.

Applicable Legislative Provisions

National Instrument 61-101 Protection of Minority Security Holders in Special Transactions, ss. 8.1(1), 9.1(2).

IN THE MATTER OF

THE SECURITIES ACT,

R.S.O. 1990, c.S.5, AS AMENDED

AND

IN THE MATTER OF

ACREAGE HOLDINGS, INC.

ORDER

(Section 9.1 of Multilateral Instrument 61-101)

UPON the application (the “Application”) of Acreage Holdings, Inc. (formerly, Applied Investments Management Corp.) (the “Filer”) for an order pursuant to section 9.1 of Multilateral Instrument 61-101 Protection of Minority Security Holders in Special Transactions (“MI 61-101”) exempting the Filer from the requirements in subsection 8.1(1) of MI 61-101 to obtain minority approval for the Transaction (as defined below) from the holders of each affected class of shares of the Filer, in each case voting separately as a class (the “Minority Approval Requirements”);

AND UPON considering the Application and the recommendation of staff of the Commission;

AND UPON the Filer having represented to the Commission that:

1. The Filer was incorporated under the Business Corporations Act (Ontario) on July 12, 1989 as “Applied Inventions Management Inc.”. On August 29, 2014, the Filer’s name was changed from Applied Inventions Management Inc. to “Applied Inventions Management Corp.” (“AIM”). On November 14, 2018, High Street Capital Partners LLC (“HSCP”) completed a reverse takeover of the Filer, concurrent with which the Filer continued into British Columbia as “Acreage Holdings, Inc.” under the Business Corporations Act (British Columbia) (the “RTO”).

2. The Filer’s head office is located at 366 Madison Avenue, New York, New York 10017, and its registered and records office is 2800 Park Place, 666 Burrard Street, Vancouver, British Columbia, V6C 27Z.

3. The Filer is a reporting issuer in Ontario and British Columbia. The Filer is not in default of its obligations under the securities legislation in any of the jurisdictions of Canada.

4. The Filer operates primarily in the cannabis industry, with a focus on the cultivating, processing, distributing and retailing of top quality cannabis, cannabis derivative products and branded products in the United States.

5. The authorized share capital of the Filer consists of an unlimited number of Class A subordinate voting shares, carrying one vote per share (the “Subordinate Voting Shares”), an unlimited number of Class B proportionate voting shares, carrying 40 votes per share (the “Proportionate Voting Shares”) and an unlimited number of Class C multiple voting shares, carrying 3,000 votes per share (the “Multiple Voting Shares”). The Multiple Voting Shares are all held by Kevin Murphy, Founder and Chief Executive Officer of the Filer.

6. As at May 13, 2019, the outstanding share capital of the Filer (the “Filer Shares”) consists of: (i) 57,458,462 Subordinate Voting Shares; (ii) 743,143.6551 Proportionate Voting Shares; and (iii) 168,000 Multiple Voting Shares.

7. As at May 13, 2019, the issued and outstanding Subordinate Voting Shares, Proportionate Voting Shares and Multiple Voting Shares represent approximately 9.1%, 5.6% and 85.3%, respectively, of the aggregate voting rights attached to the outstanding Filer Shares.

8. The Filer is a “Foreign Private Issuer” as defined in Rule 405 under the United States Securities Act of 1933 and Rule 3b-4 under the United States Securities Exchange Act of 1934.

9. If more than 50% of the outstanding voting securities of the Filer (as determined under Rule 405 of the United States Securities Act of 1933) are directly or indirectly held of record by residents of the United States (the “Threshold”), the Filer will no longer meet the definition of a Foreign Private Issuer, which may have adverse consequences with respect to the Filer’s ability to raise capital in private placements or Canadian prospectus offerings.

10. In December 2016, the United States Securities and Exchange Commission (the “SEC”) issued a Compliance and Disclosure Interpretation to clarify that issuers with multiple classes of voting stock carrying different voting rights may, for the purposes of calculating compliance with the Threshold, examine either (i) the combined voting power of its share classes, or (ii) the number of voting securities, in each case held of record by U.S. residents. Based on this interpretation, each issued and outstanding Proportionate Voting Share and each issued and outstanding Multiple Voting Share is counted as one voting security and each issued and outstanding Subordinate Voting Shares is counted as one voting security for the purposes of determining the Threshold.

11. As such, the Proportionate Voting Shares were created for the sole purpose of ensuring that the Filer maintains its Foreign Private Issuer status under United States securities laws. The share structure of the Filer was approved on the basis of ensuring that the Filer would hold Foreign Private Issuer status by all shareholders of AIM and all unit holders of HSCP, in conjunction with the RTO.

12. The holders of the Subordinate Voting Shares, Proportionate Voting Shares and Multiple Voting Shares have the same rights and obligations, and no holder of Filer Shares is entitled to any privilege, priority or preference in relation to any other such holder, subject to the following:

(a) The Subordinate Voting Shares are listed on the Canadian Securities Exchange (the “CSE”) under the symbol “ACRG.U”, are quoted on the OTCQX^® Best Market by OTC Markets Group (the “OTCQX”) under the symbol “ACRGF” and are traded on the Open Market of the Frankfurt Stock Exchange (“FRA”) under the symbol “0VZ”. The Proportionate Voting Shares and the Multiple Voting Shares are not listed or posted for trading on any stock exchange.

(b) Each Proportionate Voting Share is convertible into 40 Subordinate Voting Shares. Each Multiple Voting Share is convertible into one Subordinate Voting Share.

(c) In the event of the liquidation, dissolution or winding-up of the Filer, whether voluntary or involuntary, or in the event of any other distribution of assets of the Filer among its shareholders for the purpose of winding up its affairs, the holders of Proportionate Voting Shares are entitled to participate pari passu with the holders of Subordinate Voting Shares and Multiple Voting Shares in an amount equal to the amount of such distribution per Subordinate Voting Share and Multiple Voting Share, multiplied by 40.

(d) No dividend may be declared on the Subordinate Voting Shares unless the Filer simultaneously declares dividends on the Proportionate Voting Shares in an amount equal to the dividend declared on the Subordinate Voting Shares, multiplied by 40, or on the Multiple Voting Shares in the amount of the dividend declared on the Subordinate Voting Shares.

(e) No Multiple Voting Shares are permitted to be transferred by the holder thereof without the prior written consent of the Filer’s board of directors (the “Board”).

13. By their terms, the Proportionate Voting Shares and Subordinate Voting Shares were intended to be identical, but for the proportionate (a) voting, (b) conversion, and (c) participation on liquidation, dissolution or winding-up rights, outlined in Paragraph 12.

14. Canopy Growth Corporation (“Canopy Growth”) is a corporation governed by the Canada Business Corporations Act.

15. Canopy Growth is a reporting issuer or the equivalent thereof in each of the provinces of Canada, excluding Québec, and its common shares are listed on the Toronto Stock Exchange under the symbol “WEED”, and on the New York Stock Exchange under the symbol “CGC”.

16. The head office of Canopy Growth is located at 1 Hershey Drive, Smiths Falls, Ontario, Canada, K7A 0A8.

17. On April 18, 2019, the Filer entered into an arrangement agreement (the “Arrangement Agreement”) with Canopy Growth pursuant to which the Filer agreed to complete an arrangement (the “Arrangement”) under the Business Corporations Act (British Columbia) (the “BCBCA”), which will result in, among other things, the articles of the Filer (the “Filer Articles”) being altered to provide Canopy Growth with the right (the “Canopy Growth Call Option”) to acquire all of the issued and outstanding Filer Shares in consideration for the payment of an aggregate of USD$300,000,000 (the “Aggregate Option Premium”) to holders of the Filer Shares and holders of certain securities exchangeable for Filer Shares (with the payment to holders of Proportionate Voting Shares being adjusted as though each Proportionate Voting Share was converted into 40 Subordinate Voting Shares in accordance with the terms of the Proportionate Voting Shares), and the issuance to each holder of the Filer’s Subordinate Voting Shares (following the automatic conversion of each Proportionate Voting Share and Multiple Voting Share into Subordinate Voting Shares in accordance with the terms of the Arrangement) of 0.5818 of a common share in the capital of Canopy Growth (each whole share, a “Canopy Share”) for each Filer Subordinate Voting Share held (the “Transaction”).

18. The Transaction is a “business combination” for purposes of MI 61-101 and is therefore subject to the applicable requirements of MI 61-101, on the basis that Kevin Murphy, the founder and Chief Executive Officer of the Filer constitutes an “interested party” in accordance with MI 61-101 and is entitled to receive a “collateral benefit” as a consequence of the Transaction, as such term is defined in MI 61-101. Such requirements include, among other things, obtaining approval for the Transaction by a majority of votes cast by the holders of each class of Filer Shares, excluding the votes attached to Filer Shares beneficially owned, or over which control or direction is exercised, by any party specified in subsection 8.1(2) of MI 61-101 (the “Disinterested Shareholders”), at a shareholder meeting held by the Filer. The Disinterested Shareholders include the holders of Subordinate Voting Shares and Proportionate Voting Shares, with the exception of Kevin Murphy, the Chief Executive Officer of the Filer, Murphy Capital LLC, an entity over which Mr. Murphy exercises direction or control, and The Kevin Murphy 2018 Annuity Trust. In aggregate, these persons hold approximately 12.4% of the Proportionate Voting Shares, and all of the Multiple Voting Shares. The Multiple Voting Shares will be excluded from the vote of the Disinterested Shareholders.

19. MI 61-101 was adopted to ensure the fair treatment of all security holders and the perception of such in the context of insider bids, issuer bids, business combinations and related party transactions.

20. The approval of the Transaction is subject to a number of mechanisms to ensure that the collective interests of the holders of Filer Shares are protected, including the following:

(a) the creation of a special committee composed of independent directors (the “Special Committee”) whose mandate was to review the terms and conditions of the Transaction. In order to properly fulfill its mandate, the Special Committee retained the services of independent legal and financial advisors. The Special Committee unanimously recommended to the Filer's Board that the Transaction be approved;

(b) the Filer will prepare and deliver to its shareholders an information circular (the “Information Circular”) in accordance with applicable securities law requirements that will provide shareholders with sufficient information to enable them to make an informed decision in respect of the Transaction;

(c) the Board and the Special Committee thereof has each obtained a fairness opinion from each of Canaccord Genuity Corp. and INFOR Financial Inc., respectively, stating that, as of the date of the respective opinions and subject to the assumptions, limitations, and qualifications on which such opinions are based, the consideration to be received by holders of Filer Shares pursuant to the Transaction is fair, from a financial point of view, to the holders of Filer Shares (collectively, the “Fairness Opinions”);

(d) the approval of the Transaction by the majority of votes cast by the Disinterested Shareholders voting together as a single class (each Subordinate Voting Share carrying one vote and each Proportionate Voting Share carrying 40 votes);

(e) a right of dissent to the benefit of Disinterested Shareholders; and

(f) approval of the Supreme Court of British Columbia of the Arrangement

(together, the “Safeguard Measures”).

21. The Board and the Special Committee are of the view that the Safeguard Measures are the optimal mechanisms to ensure that the public interest is well protected and that holders of the Filer Shares are treated fairly and in accordance with their voting and economic entitlements under the Filer’s constating documents.

22. Under the BCBCA, there is no entitlement to separate class votes with respect to the approval of an arrangement. The Filer Articles provide holders of each class of Filer Shares to vote by separate special resolution to alter or amend the Filer Articles if same would prejudice or interfere with any rights or special rights attached to the class of Filer Shares, or affect the rights of the holders of such class of Filer Shares on a per share basis as provided in the Filer Articles. The Filer has determined that the alteration of the Filer Articles in accordance with the Arrangement would not prejudice or interfere with any rights or special rights attached to the Subordinate Voting Shares or the Proportionate Voting Shares, or affect the rights of the holders of such shares on a per share basis as provided in the Articles. The Filer has further determined that the Arrangement does not affect holders of Subordinate Voting Shares in a manner that is different from its effect on the holders of Proportionate Voting Shares.

23. Separate class votes by the holders of Subordinate Voting Shares and Proportionate Voting Shares would have the effect of granting disproportionate importance to one class of Filer Shares over another. Despite the fact that Disinterested Shareholders holding Proportionate Voting Shares would represent 28.9% of the total vote of Disinterested Shareholders on an aggregate basis, holders of Proportionate Voting Shares representing 14.5% of the total vote of Disinterested Shareholders could be afforded a veto right in respect of the Transaction that could be exercised against all other Disinterested Shareholders. Such an outcome would not be in accordance with the reasonable expectations of the holders of Filer Shares.

AND UPON the Commission being satisfied that to do so would not be prejudicial to the public interest;

IT IS ORDERED pursuant to section 9.1 of MI 61‑101 that the Filer be exempt from the Minority Approval Requirements in connection with Transaction, provided that the following mechanisms are implemented and remain in place:

1. a special meeting of the Filer’s shareholders is held in order for the Disinterested Shareholders of the Filer to consider and, if deemed advisable, approve the Transaction, such approval to be obtained with the Disinterested Shareholders of the Filer voting together as a single class of the Filer;

2. the Information Circular is prepared and delivered by the Filer to its shareholders in accordance with applicable securities law requirements; and

3. the Fairness Opinions are included in their entirety in the Information Circular.

DATED at Toronto this 17th day of May, 2019.

“Naizam Kanji”

Director, Office of Mergers & Acquisitions

Ontario Securities Commission