Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 1 of 32
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`UNITED STATES DISTRICT COURT
`SOUTHERN DISTRICT OF NEW YORK
`
`GANESH KASILINGAM, individually and on
`behalf of all others similarly situated,
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`Case No. 20-cv-03459-PAC
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`Plaintiff,
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`- against-
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`TILRAY, INC., BRENDAN KENNEDY, and
`MARK CASTANEDA,
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`Defendants.
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`MEMORANDUM OF LAW IN SUPPORT OF THE DEFENDANTS’
`MOTION TO DISMISS THE SECOND AMENDED COMPLAINT
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`BAKER & HOSTETLER LLP
`45 Rockefeller Plaza
`New York, New York 10111
`Tel. 212-589-4200
`Fax. 212-589-4201
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`Attorneys for Defendants
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 2 of 32
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`TABLE OF CONTENTS
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`Page
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`I.
`
`II.
`
`Introduction ..........................................................................................................................1
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`Factual Background .............................................................................................................3
`
`A.
`
`B.
`
`C.
`
`D.
`
`E.
`
`F.
`
`G.
`
`H.
`
`Tilray is a Leader in the Nascent Global Cannabis Industry. ..................................3
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`The Farm Bill Spurs Tilray to Enter into First of Its Kind ABG Agreement. .........4
`
`Tilray’s 2018 10-K Reflects Continued Growth and Identifies Material
`Weakness. ................................................................................................................6
`
`Tilray Worked Hard to Properly Account for and Capitalize on ABG
`Agreement. ...............................................................................................................7
`
`Privateer Proposes Mutually Beneficial Downstream Merger. ...............................8
`
`Developments at the End of 2019 Raise Concerns about the ABG
`Agreement’s Near-Term Profitability, and Tilray Takes Appropriate Action. .......9
`
`Tilray’s 2019 10-K Recognizes ABG Impairment and Writes Down
`Inventory. ...............................................................................................................10
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`Tilray and Aphria Negotiate and Consummate a Merger. .....................................11
`
`III.
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`Legal Argument .................................................................................................................12
`
`A.
`
`B.
`
`C.
`
`D.
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`Heightened Pleading Standards Govern Plaintiffs’ Claims. ..................................12
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`The Challenged Statements Were True and Not Misleading. ................................12
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`1.
`
`2.
`
`3.
`
`4.
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`Positive Statements about the ABG Deal ..................................................12
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`Statements Reporting ABG’s Valuation, and Tilray’s Assets and Net
`Loss ............................................................................................................14
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`Statements Regarding Inventory ................................................................16
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`Statements Reporting Cost of Sales and Gross Margins ...........................18
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`Plaintiffs Cannot Allege a Strong Inference of Scienter. .......................................19
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`Plaintiffs Cannot State a Section 20A Claim for Insider Trading. ........................25
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`IV.
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`Conclusion .........................................................................................................................25
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`i
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 3 of 32
`
`
`
`Cases
`
`TABLE OF AUTHORITIES
`
`
`
`Page(s)
`
`In re AmTrust Fin. Servs., Inc. Sec. Litig.,
`No. 17-cv-1545 (LAK), 2019 WL 4257110 (S.D.N.Y. Sept. 9, 2019) ...................................16
`
`ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
`493 F.3d 87 (2d Cir. 2007).......................................................................................................25
`
`In re Axonyx Sec. Litig.,
`No. 05-cv-2307 (TPG), 2009 WL 812244 (S.D.N.Y. Mar. 27, 2009).....................................25
`
`In re Bank of Am. Corp. Sec., Derivative, and Emp. Ret. Income Sec. Act (ERISA)
`Litig.,
`No. 09-md-2058 (PKC), 2011 WL 3211472 (S.D.N.Y. July 29, 2011) ..................................23
`
`City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc.,
`856 F.3d 605 (9th Cir. 2017) ...................................................................................................15
`
`Dempsey v. Vieau,
`130 F. Supp. 3d 809 (S.D.N.Y. 2015) ......................................................................................17
`
`Dura Pharm., Inc. v. Broudo,
`544 U.S. 336 (2005) .................................................................................................................18
`
`ECA, Local 134 IBEW Joint Pension Tr. of Chicago v. JP Morgan Chase Co.,
`553 F.3d 187 (2d Cir. 2009).....................................................................................................19
`
`In re Elan Corp. Sec. Litig.,
`543 F. Supp. 2d 187 (S.D.N.Y. 2008) ......................................................................................14
`
`Fait v. Regions Fin. Corp.,
`655 F.3d 105 (2d Cir. 2011).....................................................................................................15
`
`In re Gildan Activewear, Inc. Sec. Litig.,
`636 F. Supp. 2d 261 (S.D.N.Y. 2009) ......................................................................................21
`
`Glaser v. The9, Ltd.,
`772 F. Supp. 2d 573 (S.D.N.Y. 2011) ......................................................................................20
`
`Kalnit v. Eichler,
`264 F.3d 131 (2d Cir. 2001).....................................................................................................23
`
`ii
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 4 of 32
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`In re Keryx BioPharmaceuticals, Inc. Sec. Litig.,
`No. 13-cv-1307 (KBF), 2014 WL 585658 (S.D.N.Y. Feb. 14, 2014) ...............................20, 21
`
`Menora Mivtachim Ins. Ltd. v. Int’l Flavors & Fragrances Inc.,
`No. 19-cv-7536 (NRB), 2021 WL 1199035 (S.D.N.Y. Mar. 30, 2021) ..................................24
`
`N. Collier Fire Control & Rescue Dist. Firefighter Pension Plan & Plymouth Cty.
`Ret. Ass’n v. MDC Partners, Inc.,
`No. 15-cv-6034 (RJS), 2016 WL 5794774 (S.D.N.Y. Sept. 30, 2016) ...................................21
`
`Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund,
`575 U.S. 175 (2015) ...............................................................................................12, 13, 14, 16
`
`Ronconi v. Larkin,
`253 F.3d 423 (9th Cir. 2001) ...................................................................................................23
`
`Russo v. Bruce,
`777 F. Supp. 2d 505 (S.D.N.Y. 2011) ......................................................................................23
`
`Schiro v. Cemex, S.A.B. de C.V.,
`396 F. Supp. 3d 283 (S.D.N.Y. 2019) ..........................................................................14, 18, 24
`
`Singh v. Cigna Corp.,
`918 F.3d 57 (2d Cir. 2019).......................................................................................................14
`
`Slayton v. Am. Express Co.,
`604 F.3d 758 (2d Cir. 2010).....................................................................................................14
`
`In re Take-Two Interactive Sec. Litig.,
`551 F. Supp. 2d 247 (S.D.N.Y. 2008) ......................................................................................25
`
`Tellabs, Inc. v. Makor Issues & Rights, Ltd.,
`551 U.S. 308 (2007) ...........................................................................................................12, 19
`
`Tongue v. Sanofi,
`816 F.3d 199 (2d Cir. 2016).....................................................................................................25
`
`In re Yukos Oil Co. Sec. Litig.,
`No. 04-cv-5243 (WHP), 2006 WL 3026024 (S.D.N.Y. Oct. 25, 2006) ..................................23
`
`Statutes
`
`15 U.S.C. § 78t-1(a) .......................................................................................................................25
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`15 U.S.C. § 78u-4(b) ................................................................................................................12, 19
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`iii
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 5 of 32
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`Other Authorities
`
`Alexander Beadle, “Canada’s Edibles Market Gets Off to a Slow Start,”
`Analytical Cannabis, Dec. 20, 2019, available at
`https://www.analyticalcannabis.com/articles/canadas-edibles-market-gets-off-
`to-a-slow-start-312161 ............................................................................................................10
`
`FDA, Consumer Update on CBD, last updated Mar. 5, 2020, available at
`https://www.fda.gov/consumers/consumer-updates/what-you-need-know-and-
`what-were-working-find-out-about-products-containing-cannabis-or-cannabis ......................9
`
`FDA, “FDA is Committed to Sound, Science-based Policy on CBD,” July 17,
`2019, available at https://www.fda.gov/news-events/fda-voices/fda-committed-
`sound-science-based-policy-cbd ................................................................................................7
`
`FDA, “FDA warns 15 companies for illegally selling various products containing
`cannabidiol as agency details safety concerns,” Nov. 25, 2019, available at
`https://www.fda.gov/news-events/press-announcements/fda-warns-15-
`companies-illegally-selling-various-products-containing-cannabidiol-agency-
`details .........................................................................................................................................9
`
`FDA, “Notice of Public Hearing; request for comments,” Apr. 3, 2019, available
`at https://www.federalregister.gov/documents/2019/04/03/2019-
`06436/scientific-data-and-information-about-products-containing-cannabis-
`or-cannabis-derived-compounds ...............................................................................................7
`
`FDA, “Statement from FDA Commissioner Scott Gottlieb, M.D., on signing of
`the Agriculture Improvement Act and the agency’s regulation of products
`containing cannabis and cannabis-derived compounds,” Dec. 20, 2018,
`available at https://www.fda.gov/news-events/press-
`announcements/statement-fda-commissioner-scott-gottlieb-md-signing-
`agriculture-improvement-act-and-agencys ................................................................................5
`
`Ed Lin, “Marijuana Stock Tilray is Slumping. 2 Executives are Making Big
`Sales,” Barron’s, Apr. 8, 2019, available at
`https://www.barrons.com/articles/tilray-stock-insider-sales-51554495643 ...........................21
`
`Ed Lin, “Tilray Executives are Selling the Marijuana Stock,” Barron’s, Jan. 30,
`2019, available at https://www.barrons.com/articles/tilray-ceo-sells-stock-
`51548860821............................................................................................................................21
`
`Nathaniel Meyersohn, “Barneys. Neiman Marcus. America’s stores are taking the
`leap into cannabis products,” CNN Business, Feb. 13, 2019, available at
`https://www.cnn.com/2019/02/12/business/cbd-cannabis-dsw-neiman-marcus-
`barneys-retail/index.html ...........................................................................................................5
`
`
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 6 of 32
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`Kelly Tyko, “Walgreens will sell CBD products in nearly 1,500 stores,” USA
`TODAY, Mar. 28, 2019, available at
`https://www.usatoday.com/story/money/2019/03/27/walgreens-sell-cbd-
`products-nearly-1-500-drugstores-report-says/3295939002/ ...................................................5
`Alicia Wallace, “CBD product sales are booming. Now the FDA needs to weigh
`in,” CNN Business, July 9, 2019, available at
`https://www.cnn.com/2019/07/09/business/cbd-sales-fda/index.html .......................................9
`
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`v
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 7 of 32
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`I.
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`INTRODUCTION
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`This is Plaintiffs’ third failed attempt to cobble together a coherent case. On September 27,
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`2021, this Court dismissed the First Amended Complaint (“FAC”) holding that Plaintiffs “failed
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`to adequately plead scienter.” 9/27/21 Opinion & Order (Dkt. #92; “Op.”), at 1. The Court found,
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`among other things, that the scienter allegations against Mr. Kennedy (the former CEO of Tilray,
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`Inc. (“Tilray”)) suffered from a number of “shortcomings” and that there were “many” stronger,
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`opposing non-culpable inferences.1 Id. at 15. The Court also found that Plaintiffs’ allegations were
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`“vague, speculative, and conclusory,” constituted “impermissible retrospective critique” and
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`“fraud by hindsight,” and “fail[ed] to establish that Defendants were insincere in the[] belief[s]”
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`expressed in the challenged statements. Id. at 19, 21-22, 26 (citations and quotations omitted).
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`Plaintiffs’ original scienter theory posited that Mr. Kennedy made the challenged
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`statements to inflate Tilray’s stock price so that he could effectuate a downstream merger between
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`Tilray and its controlling shareholder, Privateer Holdings (“Privateer”)—allegedly in order to
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`maintain voting control over Tilray while enjoying a reduced tax burden if he sold his shares. Id.
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`at 13. Having had that theory rejected by the Court, Plaintiffs now conjure up an even more
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`preposterous theory of motive: that the downstream merger was in fact only a “first step” in a long
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`con to effectuate a second merger that could have made (but did not) Mr. Kennedy CEO of the
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`“world’s largest cannabis company.” SAC ¶¶ 12-13, 18, 151-92. But Plaintiffs have not conjured
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`up any additional facts that might support this elaborate and farfetched theory or otherwise fix the
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`pleading deficiencies this Court identified with respect to scienter. And Plaintiffs still fail to plead
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`falsity. Plaintiffs have had ample opportunity to plead a claim and cannot, due to the fundamental
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`flaws detailed here and in Defendants’ motion to dismiss the FAC.
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`1 Plaintiffs no longer name Mark Castaneda (Tilray’s former CFO) as a defendant in this case. SAC ¶ 43.
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`1
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 8 of 32
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`*
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`*
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`*
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`The facts in this case are straightforward. Tilray is a global cannabis-lifestyle and consumer
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`packaged goods company with operations in Canada, the United States, Europe, Australia, and
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`Latin America. It has become a global leader in legal cannabis research, cultivation, processing,
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`and distribution. Tilray has always taken a long-term view with respect to its nascent industry: the
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`legal cannabis market remains subject to a great deal of regulatory uncertainty in the near-term,
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`but its future is exceptionally bright, estimated to be a $150 billion global industry in coming years,
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`with $22 billion of that in the U.S. hemp-derived cannabidiol (“CBD”) market alone.2 See Ex. 13
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`(5/14/19 Tr.), at 3-5.
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`From the beginning, strong branding has been a key component of this long-term vision.
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`Tilray has maintained a rigorous focus on quality, invested heavily in research and development,
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`and cultivated important partnerships that have helped position it as an early leader in the global
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`medical cannabis market. Thus, when the opportunity arose in early 2019 to join forces with
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`Authentic Brands Group (“ABG”)—a brand management company with a global portfolio—it
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`seemed like the perfect partnership at the perfect time: the U.S. Agricultural Improvement Act of
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`2018 (the “Farm Bill”) had just been enacted and was widely viewed as opening up the U.S. market
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`for CBD products.
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`But the industry’s hopes and expectations for regulatory clarity and a quick path forward
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`in the U.S. did not materialize. By the end of 2019, it had become clear that the U.S. Food and
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`Drug Administration (“FDA”) was not moving quickly to greenlight CBD. Accordingly, Tilray
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`conducted an impairment analysis on the value of the ABG Agreement, recognized an impairment,
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`2 All $ references are in US$, all emphasis is added, and all internal quotation marks and citations are omitted unless
`otherwise indicated.
`3 Numbered exhibits are attached to the Declaration of Douglas W. Greene and discussed in Defendants’ Request for
`Full Context Review and/or Judicial Notice (“RJN”), filed concurrently herewith.
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`2
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 9 of 32
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`and renegotiated the Agreement to better align with the new regulatory and market conditions.
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`Based on the wisdom that comes from knowing the outcome, Plaintiffs claim that the ABG
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`Agreement was never worth what Tilray paid for it and should have been impaired immediately;
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`that various positive statements in 2019 about the ABG agreement and its prospects (and certain
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`unrelated statements about inventory) were materially false and misleading; and that all this was
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`in service of a vaguely alleged motive-less fraud. Nothing in the SAC supports these assertions.
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`First, none of the challenged statements were false or misleading. Plaintiffs attack four
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`categories of statements, detailed below, but each challenged statement was a true statement of
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`fact or opinion at the applicable time, and Plaintiffs have not alleged any facts to the contrary.
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`Plaintiffs’ attempts to plead fraud-by-hindsight are unavailing and cannot ground their claims.
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`Second, Plaintiffs cannot plead the requisite strong inference that Mr. Kennedy—the only
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`remaining individual defendant—acted with scienter. As described further below, Plaintiffs’ new
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`theory of scienter is even more illogical than the prior iteration. Supreme Court precedent requires
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`courts to weigh the competing inferences to be drawn from factual allegations in their full context.
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`Here, the posited fraud makes no sense, and the facts and inferences demonstrate Mr. Kennedy’s
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`good faith. Because Plaintiffs still cannot plead a false or misleading statement, or a strong
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`inference that Mr. Kennedy made any such statement with scienter, the SAC should be dismissed
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`in its entirety with prejudice.
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`II.
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`FACTUAL BACKGROUND
`A. Tilray is a Leader in the Nascent Global Cannabis Industry.
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`Tilray is a global pioneer in what is widely expected to be a $150 billion cannabis industry.
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`It was the first medical cannabis producer with a production facility in North America to be Good
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`Manufacturing Practices (“GMP”) certified; the first producer to export medical cannabis from
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`North America to Africa, Australia, Europe, and Latin America; and among the first to be licensed
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`3
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 10 of 32
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`to cultivate and process medical cannabis in two countries, Canada and Portugal. Ex. 2 (2019 10-
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`K), at 2. In July 2018, Tilray held an initial public offering and became the first cannabis company
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`to IPO in the U.S. and trade on NASDAQ. See SAC ¶¶ 3, 25.
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`The Company’s products are available across five continents and fall into three main
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`channels—global medical cannabis, Canadian adult-use cannabis, and hemp products, including
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`CBD—each of which involves different regulatory frameworks, areas of operation, and profit
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`margins. Ex. 2 (2019 10-K), at 1-8. The Company’s global growth strategy is focused on six top-
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`line performance drivers that demand attention to quality control and strong branding. Ex. 3
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`(3/18/19 Tr.), at 3. Tilray has worked hard to achieve both, in part by partnering with established
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`industry leaders. In December 2018 (several weeks before signing the ABG deal), Tilray
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`announced it had entered into a global framework agreement with Sandoz AG (the generic division
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`of pharmaceutical giant Novartis) to develop and commercialize high-quality pharmaceutical
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`medical cannabis products. Ex. 4 (2018 10-K), at 3. That same month, Tilray also partnered with
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`multinational brewer Anheuser-Busch InBev to develop cannabis-based beverages. Id.
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`B. The Farm Bill Spurs Tilray to Enter into First of Its Kind ABG Agreement.
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`Regulated medical cannabis has been legal in Canada since 2001, but it was not until
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`October 2018 that Canada legalized recreational cannabis use. The Cannabis Act left the regulation
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`of sales and retail stores to Canada’s individual provinces, but it limited legal sales initially to
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`certain dried cannabis and oil products, with the expectation that new classes of edibles, topicals,
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`and extracts (“2.0” products) would be permitted a year later. See id. at 13.
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`Around the same time, the U.S. took its first major step towards legalizing certain cannabis
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`products at the federal level. The Farm Bill, signed into law December 20, 2018, exempted hemp
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`and hemp-derived products from the U.S. Controlled Substances Act, paving the way for
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`nationwide use, sale, manufacture, and distribution of CBD (a non-psychoactive component in
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`4
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 11 of 32
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`cannabis plants), while preserving the FDA’s regulatory authority over CBD products. Id. at 22.
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`The Farm Bill marked the first significant relaxation of federal controls and was heralded as a
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`watershed moment. In the following months, industry analysts, cannabis companies, and the media
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`expressed broad optimism that the U.S. CBD market was now in play and that the FDA would
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`soon clarify the regulatory path forward, ushering in a new era of CBD products widely available
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`across the U.S.4 Indeed, FDA Commissioner Gottlieb’s official statement on the Farm Bill
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`recognized the “potential opportunities that cannabis or cannabis-derived compounds could offer
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`and . . . the significant public interest in these possibilities,” and pledged that the FDA would
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`continue “to make the pathways for the lawful marketing of [CBD] products more efficient.”5
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`
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`In the midst of all this industry optimism, Tilray learned that ABG was looking to partner
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`with a cannabis company. It was an attractive opportunity, particularly for a brand-focused
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`company like Tilray: ABG owns more than 50 well-known global lifestyle and entertainment
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`brands (e.g., Brooks Brothers, Forever 21, Greg Norman, Nine West) and has an established global
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`network of manufacturers, operators, and retailers, generating approximately $9 billion in retail
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`sales annually. Ex. 5 (1/15/19 PR). The ABG Agreement was carefully negotiated and vetted with
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`assistance from outside experts.6 On January 15, 2019, the parties announced a long-term revenue
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`sharing agreement to develop, market, and distribute a portfolio of consumer cannabis products
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`within ABG’s brand portfolio worldwide, with immediate focus on CBD in the U.S. Id. Under the
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`agreement (“ABG Agreement”), Tilray became the preferred supplier of active cannabinoid
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`ingredients for ABG-branded products and acquired the right to receive up to 49% of the net
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`4 See, e.g., Nathaniel Meyersohn, “Barneys. Neiman Marcus. America’s stores are taking the leap into cannabis
`products,” CNN Business, Feb. 13, 2019; Kelly Tyko, “Walgreens will sell CBD products in nearly 1,500 stores,”
`USA TODAY, Mar. 28, 2019.
`5 FDA, “Statement from FDA Commissioner Scott Gottlieb, M.D., on signing of the Agriculture Improvement Act
`and the agency’s regulation of products containing cannabis and cannabis-derived compounds,” Dec. 20, 2018.
`6 Ex. 5 (1/15/19 PR), at 2 (“Tilray’s financial advisor on the transaction was BofA Merrill Lynch. [ABG]’s legal
`advisor . . . was Paul, Weiss . . . .”).
`
`5
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 12 of 32
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`revenue from those products in perpetuity, with a guaranteed minimum of up to $10 million
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`annually for 10 years. Ex. 5 (1/15/19 8-K), Item 1.01. In exchange, Tilray agreed to pay
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`approximately $100 million in cash and stock up front, plus (a) additional consideration in stock
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`(valued at $66,666,667) upon triggers relating to the sale of CBD being legal in the U.S. (Tilray
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`paid this amount in March 2019); and (b) further consideration ($83,333,333 in a combination, at
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`ABG’s election, of up to $16,666,666 in cash and the remainder in common stock), upon certain
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`triggers relating to the regulatory status of tetrahydrocannabinol (“THC”) in the U.S. See id.
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`The Farm Bill gave both parties genuine optimism that the deal would be profitable sooner
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`rather than later. Ex. 5 (1/15/19 PR). Just a month after signing the ABG Agreement, Tilray further
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`signaled its confidence in the U.S. CBD market, acquiring Manitoba Harvest—“the world’s largest
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`hemp food company”—for $317 million. Ex. 4 (2018 10-K), at 4; Ex. 3 (3/18/19 Tr.), at 4.
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`C. Tilray’s 2018 10-K Reflects Continued Growth and Identifies Material Weakness.
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`In their public filing and earnings call in March 2019, Defendants expressed continued
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`optimism about the Farm Bill, the ABG Agreement, the Manitoba Harvest acquisition, and
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`industry momentum generally. See, e.g., Ex. 3 (3/18/19 Tr.), at 5; Ex. 4 (2018 10-K), at 3-4. But
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`Tilray’s 2018 10-K also explicitly warned that both the regulatory framework for and future
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`profitability of the ABG deal remained uncertain, and outlined the potential impacts of these
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`clearly identified risk factors. Ex. 4 (2018 10-K), at 22-23. In addition, the 2018 10-K reflected
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`certain common corporate growing pains: it identified a material weakness as of December 31,
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`2018 in Tilray’s internal controls for financial reporting “relating to inventory costing and the
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`financial close process.” Id. at 58. The Company explained that management was working to
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`remedy this deficiency by “increasing the depth and experience within our accounting and finance
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`organization, as well as designing and implementing improved processes and internal controls . . .
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`.” Id. Still, Tilray’s outside auditor, Deloitte LLP, concluded that the 10-K “present[ed] fairly, in
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`6
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`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 13 of 32
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`all material respects, the financial position of the Company.” Id. at F-2.
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`D. Tilray Worked Hard to Properly Account for and Capitalize on ABG Agreement.
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`Following the ABG Agreement, Tilray consulted extensively with Deloitte and other
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`experts to ensure it was properly accounting for this complex transaction. Because the guaranteed
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`payments under the Agreement met the definition of a loan under Generally Accepted Accounting
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`Principles (“GAAP”), that portion of the Agreement’s value was accounted for as a loan, while
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`most of it was recorded as an indefinite-lived intangible asset. Ex. 2 (2019 10-K), at F-28-9, F-3-
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`5. Consistent with GAAP, that indefinite-lived intangible asset was “calculated using the fair value
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`of the cash paid and shares issued, less the fair value attributable to the loan described above.” Id.
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`at F-29. Tilray also worked closely with ABG to identify ABG brands especially well-suited to
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`CBD product offerings and to develop those product plans as quickly as possible.7
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`
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`In the spring and summer of 2019, there was broad industry optimism about the rapidly
`
`growing U.S. CBD market. In April, the FDA formed an internal working group and issued a call
`
`for scientific information and public comment, and on May 31 it convened a public hearing to hear
`
`directly from stakeholders.8 Meanwhile, CBD had become the hot new thing across many
`
`industries, and consumer packaged good (“CPG”) companies and retailers all over the U.S. were
`
`trying to get in on it.9 In the March and May earnings calls, Tilray described how it was receiving
`
`large numbers of contacts from retailers interested in CBD partnerships. See Ex. 3 (3/18/19 Tr.),
`
`at 12-13; Ex. 1 (5/14/19 Tr.), at 9. At the same time, it acknowledged this was not the case for all
`
`retailers: “[T]here are retailers in the U.S. that aren’t waiting for the FDA. And then there—as you
`
`
`7 See Ex. 3 (3/18/19 Tr.), at 14; Ex. 1 (5/14/19 Tr.), at 18.
`comments,” Apr. 3, 2019, available at
`for
`8 FDA,
`“Notice of Public Hearing;
`request
`https://www.federalregister.gov/documents/2019/04/03/2019-06436/scientific-data-and-information-about-
`products-containing-cannabis-or-cannabis-derived-compounds; FDA, “FDA is Committed to Sound, Science-based
`Policy on CBD,” July 17, 2019, available at https://www.fda.gov/news-events/fda-voices/fda-committed-sound-
`science-based-policy-cbd.
`9 See supra note 4; Ex. 3 (3/18/19 Tr.), at 12-13.
`
`7
`
`

`

`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 14 of 32
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`can imagine, there are more conservative retailers that are going to wait and see what happens with
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`some of the FDA hearings . . . over the course of this summer.” Ex. 1 (5/14/19 Tr.), at 18.
`
`E. Privateer Proposes Mutually Beneficial Downstream Merger.
`
`Amidst all this excitement, Tilray and its founder and majority stockholder—private equity
`
`firm Privateer Holdings (started by Mr. Kennedy and two others)—also were working to unwind
`
`Privateer’s interest in Tilray. Following Tilray’s IPO, Privateer held approximately 82% of
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`Tilray’s economic interest, but all of its shares were subject to a six-month lockup. SAC ¶¶ 3, 25,
`
`154. Rather than sell those shares for billions of dollars when the lockup expired in January 2019,
`
`Mr. Kennedy and the other Privateer investors announced ahead of time that, for the time being,
`
`Privateer would continue to hold its shares to avoid the negative impact that large sales might have
`
`on Tilray’s stock price. See id. ¶ 75 n.3. After some negotiation, Tilray and Privateer arrived at a
`
`mutually beneficial path forward: a downstream merger through which Tilray would cancel all of
`
`Privateer’s existing shares and issue new shares to each Privateer investor, according to their pro-
`
`rata Privateer ownership10; in turn, the Privateer investors agreed to lock up their newly issued
`
`shares with phased release controlled by Tilray’s board. This transaction served all parties’
`
`interests, allowing Privateer to unwind, ensuring orderly, controlled release of its large number of
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`Tilray shares, and providing tax benefits (as Plaintiffs note) to all Privateer investors if and when
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`they sold their shares. See id. ¶¶ 156-58. On September 9, 2019, the relevant parties executed the
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`Agreement and Plan of Merger and Reorganization (the “Downstream Merger Agreement”). Ex.
`
`8 (9/10/19 Form 8-K). On December 12, 2019, Tilray stockholders approved the downstream
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`merger, the old Privateer shares were cancelled and new ones issued, and Privateer was dissolved
`
`shortly thereafter. Id. ¶ 160-68.
`
`
`10 Except that all Class 1 shares were reissued to Privateer’s three founders, maintaining their voting control over
`Tilray. SAC ¶¶ 154-55, 161.
`
`8
`
`

`

`Case 1:20-cv-03459-PAC Document 100 Filed 02/02/22 Page 15 of 32
`
`F. Developments at the End of 2019 Raise Concerns about the ABG Agreement’s
`Near-Term Profitability, and Tilray Takes Appropriate Action.
`
`Enthusiasm around CBD lasted well into the latter half of 2019,11 but the longer the FDA’s
`
`process dragged on, the more reluctant retailers became to stock CBD products. Mr. Castaneda
`
`explained in August that they were starting to see “a lot of the major retailers holding off, especially
`
`on the ingestible products until they have more clarity. As that clarity comes in the second half,
`
`we see a significant ramp in the second half of the year. If it does not, we see a much slower ramp
`
`on the CBD side . . . on the ingestible side.” Ex. 6 (8/13/19 Tr.), at 13. Even so, the Company was
`
`seeing significant retail interest in topicals—which raised fewer FDA concerns—and expected to
`
`roll out the first ABG-branded products by year end. Ex. 7 (11/12/19 Tr.), at 11, 17.
`
`On November 25, 2019, however, the FDA surprised the industry: that day it sent warning
`
`letters to 15 companies for selling CBD products in illegal ways and revised its Consumer Update
`
`to state, among other things, that the FDA could not conclude that CBD is “generally recognized
`
`as safe (GRAS).”12 After months of silence, these actions signaled that the FDA still had
`
`substantial concerns, leading more retailers to hold off on CBD products. This new landscape had
`
`consequences for Tilray’s ABG partnership as well—ABG’s updated year-end sales projections
`
`showed that the Agreement’s path to profitability would take longer than anticipated.
`
`Tilray worked hard to mitigate the damage. It consulted with Deloitte and other experts to
`
`evaluate the financial and accounting impacts of the revised forecast, including an impairment
`
`analysis. And in January 2020, Tilray renegotiated the ABG Agreement to better reflect the altered
`
`
`11 See, e.g., Alicia Wallace, “CBD product sales are booming. Now the FDA needs to