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Aphria's medical cannabis plants grow in their greenhouse in Leamington, Ont., May 26, 2014.

GEOFF ROBINS

Part of cannabis and small business and retail

Aphria Inc. and its long-time law firm, Stikeman Elliott LLP, are expected to cut ties after a deal by the cannabis company to buy assets in Jamaica, Colombia and Argentina came under heavy scrutiny from investors.

Over the summer, Stikeman lawyers advised Aphria on the acquisition of assets in the three countries from a small Toronto company then named Scythian Biosciences Corp. Aphria and some of its executives, including chief executive Vic Neufeld, were shareholders in Scythian, which they disclosed.

Scythian netted a large gain on the deal, which was worth $193-million in stock at the time it was announced, despite the fact that it had owned the assets for a short period of time. On Dec. 3, the acquisition was called into question by two U.S. short-sellers, Gabriel Grego and Nate Anderson, who alleged that Aphria bought assets of questionable value at valuations that were “vastly inflated or outright fabrications.” The short-sellers would profit from a decline in the cannabis company’s share price, and Aphria shares lost half their value early last week.

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Aphria initially responded by saying that the allegations were “a malicious and self-serving attempt to profit by manipulating Aphria’s stock price.” On Thursday, the Leamington, Ont., company appointed a special committee made up of three independent directors to review the Scythian acquisitions and ensure the deal “conformed with all the company’s policies and generally accepted corporate governance practices.” All three directors joined Aphria’s board after the transaction was announced.

Since then, the long-standing relationship between Aphria and Stikeman has broken down, according to multiple sources in the legal industry who were granted anonymity because they are bidding for the company’s business. It is not clear which side initiated the split, but the cannabis company is said to be looking to hire a new external law firm in the near future. On Tuesday, Stikeman spokesperson Bianca Barbucci said: “We do not comment on client or internal firm matters.”

Mr. Neufeld, Aphria’s CEO, said “as of today, Stikeman is still our corporate counsel.”

The Aphria special committee hired law firm Lenczner Slaght Royce Smith Griffin LLP as its adviser, these sources said. Lawyers at Lenczner Slaght declined to comment. Lenczner Slaght is a Toronto-based litigation boutique that specializes in complex corporate cases.

Stikeman’s role as Aphria’s legal adviser is complicated by the fact that Stikeman senior partner Curtis Cusinato is Mr. DeFrancesco’s brother-in-law, according to sources with knowledge of the situation. Mr. Cusinato is a merger and acquisitions specialist.

Stikeman is one of the country’s largest law firms, with offices in five Canadian cities, along with Hong Kong, New York and Sydney. The firm has a number of cannabis industry clients: Its website notes that Stikeman recently won an award for “Canada M&A Deal of the Year” by acting for MedReleaf Corp. in its $3.2-billion acquisition by Aurora Cannabis Inc.

The short-seller’s campaign against Aphria triggered a sharp decline in the company’s stock price last week, as Aphria shares fell from $10.51 to $5. Aphria shares then rebounded as the company set out a detailed denial of the short-seller’s allegations, closing Tuesday up 9 per cent at $8.20.

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Bay Street analysts are beginning to come to Aphria’s defence in the company’s campaign against short-sellers. On Tuesday, Scotia Capital Inc. analysts Oliver Rowe and Ben Isaacson published a report that compared Aphria’s acquisition with South American takeovers by rivals Canopy Growth Corp. and Aurora. The two analysts said: "These transactions indicate to us that Aphria’s purchase price of $193-million for Colombia, Argentina and Jamaica is, at the very least, rational and perhaps even relatively inexpensive.”

“However, until Aphria satisfactorily responds directly to each allegation we maintain our under review rating,” the Scotia Capital analysts said, which means they have no recommendation on the stock.

Available now: Cannabis Professional, the authoritative e-mail newsletter tailored specifically for professionals in the rapidly evolving cannabis industry. Subscribe now.

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