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Aphria Inc. employees enter the company’s Leamington, Ont., greenhouse.

Four executives and three other directors of Aphria Inc. personally owned shares in Nuuvera Inc. at the time they orchestrated a takeover deal for the cannabis firm, but didn't disclose their holdings to investors and later voted to approve the transaction at a board meeting.

The executives included Aphria chair and chief executive officer Vic Neufeld, as well as the company's chief financial officer, Carl Merton, Mr. Neufeld said. The company says the investments were not large enough to require disclosure.

Aphria agreed to buy Nuuvera for $826-million in late January, only three weeks after Nuuvera went public on the TSX Venture Exchange.

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Aphria offered $8.50 per Nuuvera share it didn't already own in mostly stock and some cash. In February, as marijuana stocks fell after a rally and Aphria took a closer look at Nuuvera's assets, Aphria slashed the cash portion of the deal to 60 cents a share from $1.

The pair revised the terms again last week, hiking the cash offer to 62 cents. The deal for about $425-million closed Friday.

The transaction left the seven Aphria insiders with a multimillion-dollar windfall.

Last August, they acquired a total of 900,000 shares in Nuuvera for $1 each, The Globe and Mail has learned. Nuuvera, which was still private at the time and raising money to fuel its growth, sold 4 million shares in that round of financing.

Aphria itself also participated in the offering, buying 2 million shares, according to regulatory filings. (Last November, Aphria said it upped its stake in Nuuvera by another 2 million shares for $2.50 apiece.)

At Friday's closing price, the deal turned that $900,000 investment into about $4.75-million for the Aphria insiders in the space of about seven months.

The 900,000 shares in Nuuvera are owned by Mr. Neufeld, Mr. Merton, Aphria director and vice-president of infrastructure and technology John Cervini, director and vice-president of growing operations Cole Cacciavillani, and three other directors, an Aphria spokesperson confirmed on Friday. Their holdings represented 0.9 per cent of Nuuvera stock on a fully diluted basis.

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Aphria is one of Canada's largest legal pot producers, with a market cap of $2.3-billion. Nuuvera, in contrast, is much smaller and less developed.

An earlier partnership with Aphria helped fuel the growth in Nuuvera's valuation and raise its profile. Last August, in addition to investing in Nuuvera, Aphria said that it agreed to supply the company with 17,000 kilograms of marijuana a year. Aphria also announced a deal to sell Nuuvera some of its land in Leamington, Ont., where it is based, as well as agreed to help design, build and run the facility Nuuvera planned to construct on that land. In January, Aphria said it would supply Nuuvera with another 60,000 kg of cannabis annually.

In addition, Nuuvera owns another company that has applied for a licence to grow cannabis in Canada and is pushing into new markets such as Germany. It also owns another business that is licensed to handle and test controlled substances on behalf of third parties.

The personal investments of Aphria insiders in Nuuvera weren't previously disclosed in regulatory filings or on Canada's System for Electronic Disclosure by Insiders (SEDI), which tracks the trading activity of company insiders. Whether Aphria should have informed its investors depends on how material the information is – and companies have a lot of latitude in determining materiality.

"There is no requirement to disclose this information," Andrew Schwartz, a spokesperson for Aphria, said on Friday. "The investments are immaterial to Nuuvera and to the individuals who made the investments."

This news comes days after a U.S. short-seller raised questions about the deal in a research report, writing that Nuuvera's business doesn't really amount to much and that Aphria paid a hefty amount for it.

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Mr. Schwartz said that the Aphria insiders have held their Nuuvera stock in escrow, adding that they were restricted from selling their shares in the market. As part of the acquisition, that Nuuvera stock will be converted into Aphria shares, which will boost the insiders' holdings in the marijuana grower. The new Aphria shares will be disclosed and subject to blackout trading restrictions. "The board was aware of the shareholding of certain directors and management members," Mr. Schwartz said. Aphria has seven board members, according to its website – and six directors personally owned shares in Nuuvera.

Mr. Schwartz added that in considering the Nuuvera deal, the board appointed a special committee of independent directors, and management pitched the rationale for the purchase to them.

The special committee received a fairness opinion from Cormark Securities Inc. and financial advice from Stoic Advisory Inc., a small Toronto advisory firm that focuses on the cannabis sector. Legal advice came from Stikeman Elliott LLP.

The special committee unanimously approved a recommendation to proceed with the transaction to the board for a final vote, according to Mr. Schwartz. He said the personal investments in Nuuvera didn't warrant any recusals.

"The board received the special committee's unanimous recommendation and approved the deal while aware of the immaterial investments, which did not warrant any recusal," Mr. Schwartz added.

Even though the four Aphria executives have much larger stakes in Aphria than they did Nuuvera, their undisclosed personal stakes in Nuuvera raise questions around the potential for conflicts of interest.

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Conflicts arise when a director or officer has a material interest in another company entering into a material transaction with their company, per the Ontario Business Corporation Act. It says that these conflicted company insiders should neither attend any part of a board meeting when the transaction is being discussed nor should they vote on the deal.

The seven Aphria insiders participated in Nuuvera's third private placement after its so-called founders round. By then, more than 70 million shares had already been issued. As of Friday, the company had more than 80 million shares outstanding, excluding those tied to warrants and options.

Aphria says it wasn't its place to disclose the investments of its executives and directors. "The disclosure of the board members and the executives who participated in the private placement is not our disclosure to make," Mr. Schwartz said.

An e-mail on Sunday to Mr. Neufeld, Mr. Cervini, Mr. Cacciavillani and Mr. Merton requesting comment wasn't immediately returned.

During a coincidental encounter on Friday morning in the lobby of the Shangri-la Hotel in Toronto, Mr. Neufeld told The Globe and Mail that he didn't think it was necessary to inform investors that he and other Aphria insiders personally own Nuuvera stock. "Totally immaterial," he said. "It's not a story. It's nothing."

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