Cannabis Musings - April 29, 2024

Something of a requiem for MedMen

Friends, as you may have heard, MedMen is no more.  It has ceased to be.  It is an ex-cannabis operator. 

A requiem for a heavyweight.  For a period of time, MedMen was the groisser k’nacker in the industry.  They had highly-distinctive branding identity and recognition that most operators today would kill for.  Their ad campaigns were clever and their stores inviting.  They had investors throwing money at them (granted, in the 2017-19 heyday, everyone was showered with cash).   They were a big deal.  The story behind the scenes was another matter, a story that’s been told and retold and retold, and to me exemplifies the frenzy of the early days of our state-legal cannabis industry.  We don’t need to rehash that tale, but suffice it to say, someone needs to write a book about it.  (Full disclosure: MedMen was briefly a client of mine when I was practicing law, and, at one point, I was approached to become their General Counsel.)

However, this being Cannabis Musings, we’re not going to focus on the big picture - we’re going to dive into their liquidation process.  In particular, you may be wondering how they filed for bankruptcy when it’s not available to US operators.  Well, they did it by filing for bankruptcy up north in Canada, because they have a Canadian parent entity (which was publicly-traded until their stock ceased trading … stock that was once worth $3 billion).  At the same time, they filed for receivership in California for the US entities and assets.

What does that mean?  Well, receivership is sort of like dairy-free ice cream.  It sort of hits the highlights and kind of tastes reminiscent of the real thing, but it’s just not as satisfying.  In short, it’s a state-court process (as opposed to bankruptcy, which, in the US, is federal) that gives structure to the sale and liquidation of a business.  The main difference is that receivership doesn’t provide the debtor (the entity that owes all that money) with any of the key protections afforded by a proper bankruptcy.  In particular, bankruptcy stays all litigation and enforcement against the debtor, and a bankruptcy court may revise and eliminate debts in the process. 

For example, let’s say my infused knish company has come on hard times.  People are cutting back on starches (perish the thought!), sales are down, and the company isn’t paying its bills. Multiple creditors have filed lawsuits to collect their debts.  If my knish company files for bankruptcy protection, all of those lawsuits are halted, and there’s a process under the US Bankruptcy Code to negotiate those debts down (reorganization), cancel onerous contracts, and allow the company to live another day (hopefully with me still in charge of my infused knish empire).

However, US Bankruptcy Courts still won’t allow US plant-touching companies to take advantage of the US Bankruptcy Code.  So, instead, my knish company is forced to file for receivership in state court.  The typical path in receivership is for a trustee to step in and manage the process of selling off the assets to pay back the creditors pro rata (there is also liquidation in bankruptcy).  But that doesn’t stop the lawsuits, and there’s a chance that a creditor wins a lawsuit, and then files a lien to secure that judgment.  Even if I negotiate a deal with my largest creditor, that doesn’t affect any of my other debts.  So, the trustee effectively has to get creditors to consensually play ball, while the bankruptcy code forces that upon them.  There’s of course a lot of nuance to this and I’m being reductive here, but the point is that receivership simply doesn’t afford a distressed company the same powerful tools as bankruptcy. 

Understanding this distinction is important to understanding why US-based cannabis companies mostly haven’t done this before (Flower One being a notable exception).  First off, the US operator needs to have a Canadian presence, which is basically any US operator that has stock traded up in Canada.  You can’t file for bankruptcy in Canada if you’re not in Canada.  Second, it really only works if you’re shutting down and liquidating the company.  Flower One negotiated separately a deal with its main creditor regarding its US assets, basically handing over the keys to its Nevada-based operations.  MedMen didn’t have that option, so it’s forced to accept receivership to deal with its US based assets and liabilities. 

This is why we haven’t seen this much.  The vast majority of US-based cannabis companies don’t have stock traded on a Canadian exchange, so they don’t have the Canadian presence, and US receivership only acts as a framework to sell off the business.  If it were a useful tool to US operators for reorganization, we would have seen a lot of it in late 2019.

MedMen provided Cannabis Musings with a lot of content over the years.  Not only their eternally funny illegality claim from late 2022, and the most impressive trade in cannabis debt we’ve seen, but also the throughline of the industry’s cycle over the past seven years.  They were emblematic of the massive destruction of value that the industry has experienced, and unfortunately a cautionary tale for all of us.  And yet, in the end, they left us with one final, novel move in this space – figuring out how to file for bankruptcy.

Be seeing you!

© 2024 Marc Hauser and Hauser Advisory.  None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.