Why more companies are turning to reverse vesting orders, especially in the cannabis sector

A new tool in insolvency law is gaining popularity in situations where restructuring companies hold valuable licences that are non-transferable.

The reverse vesting order, or RVO, allows companies to retain licences that make the business viable – to grant educational degrees or produce cannabis, to cite two recent examples – during the creditor protection process in a manner that is usually more expedient than a standard vesting order.

“In a normal vesting order ... you take the assets out of the company and leave the liabilities behind,” said Linc Rogers, a partner in the restructuring and insolvency group at Blake, Cassels & Graydon LLP. “In a reverse vesting order, the assets stay in the company, and the liabilities get assigned out.”

The RVO, Mr. Rogers explains, allows a company to retain its licences, as well as any tax advantages it has, while placing unwanted liabilities into a newly created residual company. This effectively cleanses the original corporation, making its shares more attractive to a purchaser. The residual company either enters bankruptcy or goes through its own restructuring process.

According to a report from Davies Ward Phillips & Vineberg LLP, the RVO was used nine times in 2020, after being used just three times before.

Quest University, a private institution in British Columbia, was able to use a reverse vesting order when it filed for court protection in 2020. It was able to continue operating after Primacorp Ventures Inc. bought its buildings and land in November, 2020. Quest then leased the property from Primacorp.

“Quest was a degree granting institution, so in that case it couldn’t essentially sell their ability to grant degrees,” Mr. Rogers said. “It had to be a reverse vesting order because you needed the existing legal entity.”

The process omits the opportunity for creditors to vote on a plan of arrangement, which Mr. Rogers said makes it a controversial tool in the view of some creditors. Usually, when a company files for court protection under the Companies’ Creditors Arrangement Act, creditors are able to vote on the debtor’s plan to repay its creditors, often through shares, cash or a combination.

In the case of Quest, a creditor did contest the decision to use an RVO.

“The court was satisfied, in that case, that there was no other alternative available, that the company and the purchaser we’re acting reasonably and that the creditor was acting unreasonably,” Mr. Rogers said.

The RVO has been used multiple times in the cannabis sector, in which there’s been significant volatility and consolidation over the past year. Cannabis producers must have licences issued by Health Canada to operate legally. Cannabis companies Wayland Group Corp., Beleave Group, Green Relief Inc. and Tidal Health Solutions Ltd. all used RVOs in 2020.

Ranjeev Dhillon, a partner and co-lead of the cannabis law group at McCarthy Tétrault, sees many advantages in the RVO for cannabis firms, including speed of recovery.

“It’s going to be faster because you don’t have to worry about having the company relicensed and having to worry about getting new security clearances issued,” he said.

“It maximizes the value of the debtor assets because you have certainty of closing and timing,” Mr. Dhillon added. “To be able to get to a resolution as fast as possible is very important when you’re dealing with these sorts of organic products.”

Licence retention is a key advantage of the RVO, especially in the cannabis sector. When CannTrust Holdings Inc. was stripped of its licence in 2019 for growing cannabis in unlicensed facilities, it had to destroy $77-million worth of product to comply with regulations.

Mr. Dhillon expects the RVO to become “the norm” in cannabis restructuring.

“Particularly in the cannabis sector recently, the creditors are probably not going to get a dollar for dollar on their investment ... but because the licence remains in place, it also maximizes the value and that value ultimately ends up with the creditors,” he said. “I don’t want to say it’s a win-win, but it’s making the best of a bad situation for all parties.”

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