Here are my thoughts based on a review of the complaints and responses filed by the Lender (1235 Funds) and the Borrower (Sol Global) that have been made publicly available:
Question 1:
Is the Lender right in claiming that there has been essentially a breach/event of the debenture as a result of the RTO on Verano
Opinion: In my opinion, based on the available information, the answer is probably "yes". The breach falls in the category of an "involuntary breach" which is addressed in Section 6.3:
"Section 6.3 of the Debenture further states: “If any other Event of Default shall occur for any reason, whether voluntary or involuntary, and be continuing, the Lender may by notice to the Borrower declare all or any portion of the outstanding Principal Amount of this Debenture and accrued interest on this Debenture to be due and payable, whereupon the full unpaid amount of this Debenture which shall be so declared due and payable shall be and become immediately due and payable without further notice, demand or presentment.”
Question 2:
Does the breach constitute a payment, at the option of the Lender, in cash or in Verano securities?
Opinion: Probably not and here are several reasons why:
a. Section 2.1 (1) (the section that references Verano shares in lieu of cash), is based on payment at the "Maturity Date" and does not offer or reference a payment of equity in the event of a breach. Since the Lender has claimed a breach as its rationale for exercising a purported equity option, there is no equity option remedy available under this section.
b. Section 2.1(1)(a) clearly only applies in the event of the completion of a Verano and Harvest merger. I believe both parties agree on this point.
c. Section 2.1(1)(b)(i) describes the delivery of Verano shares on the "Maturity Date" (which is not applicable since this a claim based on a breach accelerating payment ahead of the Maturity date)
d. Section 2.1(1)(b)(i) states that the number of shares in question is to be based on the transaction price and closing dates of the Verano Acquisition by Harvest which never happened. If the equity option were irregardless of a Harvest transaction, than this section would be rendered moot and "uncalculable" as the prices and number of shares in question would not be calculable.
e. The first page of the Debenture states “promises to pay to or to the order of Gundy Co. in trust for 1235 Fund LP… as nominee for 1235 Fund LP (hereinafter referred to as the “Lender” or the “Debentureholder”), the principal amount of fifty million dollars ($50,000,000) (the “Principal Amount”) in lawful money of Canada.” The lack of any reference to this being a traditional "convertible security" outside of the discussion of the event of a Harvest transaction lends credence to the idea that any equity option existed only in the context of a Harvest merger and any such equity option would not be "calculable" or due outside of that.
f. The fact that the Lender had a "short position" in Harvest that it was covering through the exchange of shares received from Verano if the merger was completed
Question 3:
What happens if, let's say for the sake of argument, that the Lender prevails on the Second Question?
Opinion: The Lender must overcome Section 347 of the Criminal Code of Canada, as the effective annual rate of interest would exceed the highest permitted rate of 60% by a significant multiple. The amounts that the lender is seeking is orders of magnitude above those rates. It would be considered a criminal rate first, by entering into an arrangement or agreement to receive interest at a criminal rate. Second, by receiving payment of interest at a criminal rate. It is unclear as to whether this would "nullify" the compensation or cap the compensation. My guess is "nullify" due to its criminality from the getgo. If it is nullified, than the Lender may only be entitled to a return of its principal at the 6% rate. However, if the rate is simply capped at 60% annually, than the lender may be entitled to its original principal balance + 60% interest annually (I will assume compounded). Since the principal amount of the Debenture was $50MM CAD (i.e., $39.3MM USD approximately), this would equate to at most $100MM USD compounded annually for 2 years (although it would likely be slightly less since the claim for breach/default was done in February so only 1.75 years approximately.
It is likely this will drag on for months as the parties litigate jurisdiction, conduct discovery, depositions and filings. In the end, I believe that the parties will likely settle for somewhere in the range of $60MM - $100MM based on the above information. It will be difficult for the Lender to overcome all the points above.
This is only my opinion and I do not claim to be a lawyer or to have any visibility to anything other than what is publicly available. I could be wrong, and you should do your own research in making any decions.