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Brent Zettl, founder of CanniMed, holds a marijuana plant in one of their research labs in Saskatoon, Sask.

Matt Smith/The Globe and Mail

The chief executive officer of CanniMed Therapeutics Inc. says two directors launched a covert campaign to sell the medical cannabis producer after they and the rest of the board agreed to pursue a deal that would position it for the recreational weed market.

CanniMed CEO Brent Zettl says that long-time board members Rob Duguid and Doug Banzet, who are also representatives of large CanniMed shareholders, shopped the company around to other marijuana producers without the knowledge of their fellow directors or the management. They eventually helped engineer a hostile bid from Aurora Cannabis Inc., according to allegations by CanniMed.

"We had no knowledge they were doing this," Mr. Zettl said in an interview with The Globe and Mail. "They were just working behind the scenes."

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On Monday, CanniMed formally urged its shareholders to reject Aurora's all-share $550-million offer and vote in favour of its own friendly takeover of Newstrike Resources Ltd., a deal aimed at readying it for Canada's recreational pot market, due to be legalized in the middle of 2018. Newstrike is known for its backing from the Tragically Hip, the Kingston rockers.

CanniMed has also applied to the Ontario Securities Commission to have the Aurora all-share offer deemed a bid by insiders, which would require approval by a majority of shareholders excluding major investors that have pledged their 38 per cent to lock-up agreements. The locked-up shareholders include SaskWorks Venture Fund Inc., Apex Investments LP, Golden Opportunities Fund Inc. and Vantage Asset Management Inc.

CanniMed shareholders are slated to vote on the Newstrike deal early next year, and the odds of the arrangement proceeding are much slimmer if the rest of the shareholders vote with the major investors.

Neither Mr. Duguid, who has since resigned as director, nor Mr. Banzet, who remains on the board but has recused himself from deal-related proceedings, responded to requests to comment on CanniMed's charges.

They raise questions about whether board members acted in the best interests of all CanniMed's shareholders, especially if two of them had engaged in their own sales process. Mr. Duguid and Mr. Banzet were among directors who supported the pursuit of the Newstrike deal in June, according to Mr. Zettl.

It wasn't until slightly more than an hour before a Nov. 13 board meeting to sign off on the final details of the Newstrike deal that CanniMed received an offer letter from Aurora outlining the support from the major shareholders, Mr. Zettl said. The timing shows that the Newstrike deal is not a defensive tactic being used to thwart Aurora, he said.

"When we started doing some digging, you could start to see that this is akin to financial guerrilla tactics. We're saying there's enough information there that we have to bring attention to all the different parts … before the securities commissions, because this is very, very unusual," he said. "We're very, very concerned about the manner in which this was done and the legality surrounding it."

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CanniMed is also questioning the actions of investment bank Canaccord Genuity, which it says had access to its confidential financial and operating data as an adviser to Newstrike before being engaged by Aurora for its hostile bid.

"Canaccord was subject to non-disclosure obligations with respect to CanniMed's confidential information and a breach of these obligations has significant administrative law consequences. Aurora knew or should have known of this inappropriate conduct and the consequences of such actions," it said in its application, one in a flurry of announcements Monday related to the takeover scrap.

A Canaccord Genuity official declined to comment, citing a policy not to talk about any current mandates. It is not known whether the bank, which has a long-term relationship with Aurora, destroyed any paperwork and deployed a different team for the hostile bidder after severing its contract with Newstrike, as is standard practice.

Part of a deal-making rush in Canada's red-hot marijuana market, Aurora has offered 4.53 of its shares for each CanniMed share to a maximum of $24 a CanniMed share. Aurora said CanniMed shareholders will benefit from faster expansion, a more diversified mix of products and wider geographic footprint.

CanniMed argues that Aurora is trying to use an inflated share price to scoop up the company before it reaches its potential through the Newstrike takeover.

CanniMed has deep roots in Canada's legal cannabis market. Its parent company was the sole supplier of medical cannabis to Health Canada from 2000 to 2013. This year, it decided it was going to serve the recreational market by acquiring another firm, rather than starting from scratch.

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Also on Monday, Aurora applied to the OSC to reduce the 105-day period for which an unsolicited bid must remain open under CanniMed's shareholder rights plan. As it stands, the timing would put the deadline for the Aurora bid at March 9, long after the shareholder votes for the Newstrike deal.

In its filing, Aurora argues that the Newstrike deal represents an "alternative transaction" under the plan, even though it is not a bid for CanniMed, which would be the normal interpretation under the rules.

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