On the Deal Q&A: Flexibility Wins the Race

Village Farms and Emerald Health built their cannabis partnership fast ­— and on a tight deadline
When it comes to cannabis, “joint” venture takes on a whole new meaning. Amid huge regulatory uncertainty ­— and the looming deadline next July — lawyers understood the need for flexibility when structuring the JV that established Pure SunFarms Corp. 

LEXPERT: A “marriage” between a producer of greenhouse vegetables and a medical cannabis company is unique. What were the advantages of partnering up on this?
James Beeby, McCullough O’Connor Irwin LLP (for Emerald Health): Well, you have a licensed producer of marijuana with deep experience in the life science industry coming together with a company with a large-scale agricultural business both bringing their own unique expertise and perspective to the table. To me this really seems to be a case where the whole is greater than the sum of the parts.
Michael ZackheimTorys LLP (for Village Farms): It’s unique in that it brings together two organizations with complimentary expertise. Village Farms International is one of the largest, most experienced and technically advanced greenhouse growers in North America. Emerald Health has significant cannabis industry experience, including a portfolio of high-quality genetics and refined standard operating procedures.  Because cannabis is an agricultural crop, significant agricultural growing experience is essential. But many in the Canadian cannabis sector have limited experience in this, which can pose a significant business risk. The JV is also unique in terms of converting an existing, large-scale greenhouse operation to cannabis production. The use of existing facilities provides for speed to market and, at 1.1 million square feet of growing space at the initial greenhouse, it’s among the largest facilities  existing or planned  in Canada.
Sabrina Gherbaz, Torys LLP (for Village Farms): Village Farms has an operational greenhouse which can be converted into a cannabis growing facility more quickly and at a lower cost than constructing a new greenhouse cannabis growing facility. Emerald has a seasoned management team with experience in securing licences to cultivate medical cannabis under the Marihuana for Medical Purposes Regulations (MMPR) and extensive downstream product development expertise. The combination of the existing greenhouse facility, meaningful growing expertise and seasoned management team with licensing experience makes Village Farms and Emerald natural partners who should be able to quickly and cost effectively service the recreational cannabis market once legalized.
Beeby: A key component to Emerald’s business plan is to rapidly and cost-effectively scale up production capacity. Partnering with a company that already had much of the infrastructure in place really helps Emerald to accelerate its timeline to scaled-up production and also gives Emerald a joint venture partner with proven expertise in managing large-scale greenhouse assets.

LEXPERT: Given the uncertainty about how the opening of the recreational market will play out, why was a flexible JV the way to go for both parties?
Beeby: There is huge uncertainty about the regulatory regime. Even though we’ve got a draft Cannabis Act now we’re still only dealing with a 30,000-foot picture and most of the implementation still needs to be worked out. Flexibility is key right now and the parties are positioning themselves as best they can to take advantage of the potential opportunities. Getting the initial greenhouse licensed and converted is going to meet the JV’s needs for some time but if all goes well the options allow the JV to effectively quadruple its growing space.
Gherbaz: There is definitely a lot of uncertainty in the cannabis sector surrounding such things as the implications of provincial legislation, distribution, branding and market demand. The joint venture was designed to include significant built-in flexibility. Some of the mechanisms that provide flexibility are the manner in which material decisions are made, options in favour of Pure Sunfarms to lease or acquire additional Canadian greenhouses from Village Farms and an ability of Pure Sunfarms to distribute cannabis to any legal buyer  not just Emerald  in both the medicinal and recreational markets. Currently, the joint venture is focused on growing and distribution within Canada but may look to get an export licence in the future.

LEXPERT: I understand speed to market was a big focus here with the market scheduled to open in July 2018. Was it demanding working under such a tight time frame? 
Zackheim: Yes, I would say the biggest challenge in executing this deal was the tight timing. The cannabis market is quickly evolving and many cannabis industry participants are moving very quickly to best position themselves for success. In order to capitalize on the opening of the Canadian recreational market, it was critical to both Emerald and Village Farms to quickly locate the right partner and to reach a mutually beneficial business deal as soon as possible.
Beeby: Because of the looming deadline for recreational marijuana and the timeframe to get licensing through Health Canada, there was a small window for getting this deal done in time for the JV to be producing before next summer, and as a result, the pace of the deal was tremendous. Our team flew into Toronto late on a Thursday night and we spent all the next day hammering out the key points of the deal. Neither side was leaving until we had all the key points settled, and we signed the deal shortly after we got back home.

 Can you give me a sense of the size of these greenhouses? How is the conversion process going? 
Beeby: These greenhouses are absolutely huge: 1.1 million square feet equates to about 25 acres, and since tomatoes don’t give rise to quite the same security concerns you get with marijuana there’s considerable work needed to get the greenhouse up to code, so to speak. The parties have decided that the best way to proceed is to convert the greenhouse a portion at a time rather than trying to tackle the entire facility all at once. Once they have a portion of the building converted and licensed they’ll move on to the next area as needed to satisfy demand. 
Stephen Ruffini, CFO, Village Farms: The conversion of the greenhouse is a large but manageable undertaking. Converting an existing greenhouse operation is certainly much quicker and less costly than greenfield construction, which is the path that many existing licensed producers are pursuing to achieve scale. Budgeting and detailed plans for the conversion are in process.

LEXPERT: Concerns about the safety of medical cannabis have been in the news of late. How do these companies stack up in terms of health and safety?
Ruffini: Emerald Health has been operating under Health Canada’s stringent Access to Cannabis for Medical Purposes Regulations (ACMPR) regime since is original licence with, to our knowledge, no issues. Village Farms has been a leader in crop applications, in both Canada and the US, for the last 30 years and has been producing fresh produce for decades without a single food safety issue. Unfortunately, a number of the new cannabis ventures in the market lack meaningful experience in crop management. Agricultural experience and expertise matters, especially when people are ingesting the product.
Beeby: Emerald’s track record is completely clean. They don’t use any pesticides and they test regularly in-house. The JV is expected to follow similar procedures to ensure that its products remain clean.

LEXPERT: What was the biggest take-away from this whole experience? 
Gherbaz: From a transactional lawyer’s perspective, in order to properly structure a cannabis-related joint venture, it is especially important to understand both your client’s and its joint venture partner’s objectives, their respective views on how the cannabis market will evolve and to be creative in attempting to resolve differences between the parties. Until there is greater understanding and certainty in the cannabis market, no two transactions are likely to be similar.