29 June 2017

Helping people to get lit since 1975

It was purely by happenstance that I discovered that a company I had once worked for from 1985 to 1990 has just been in the news this spring, through becoming the vehicle by which a medical marijuana producer has become the first publicly listed company in Canada in that industry. The company is Maricann Group Inc.

That's rather interesting, since it was an electrical lighting fixture manufacturer and distributor when I knew it, operating as Danbel Industries Inc, a subsidiary of Noma Industries Limited ("Noma"). It was founded by two brothers-in-law, Les Bresge and Ben Shtang, back in 1975, and was taken over by Noma in 1985. The circumstances behind that acquisition are irrelevant to this discussion, as I want to explain what happened to it after I left.

That is not easy, but it was still feasible as all transactions were carried out by publicly listed companies, and SEDAR provides access to all documents of such entities back to 1997, and CIPO's trademark database was useful for disclosing another material change prior to that.


1 July: Amalgamation of Danbel with Noma Inc, a subsidiary of Noma Industries Limited and manufacturer/distributor of Christmas lights and accessories at that time. It continues operations as an operating division of that company.


9 January: Noma announces that it has reached an agreement to sell the assets of Danbel to Applied Inventions Management, an unlisted junior company then trading on the Canadian Dealer Network.


10 June: After delays relating to a dispute concerning the purchase price, Noma and AIM close the deal. Immediately prior to that, AIM assigns its rights to the acquisition to 1158478 Ontario Inc, a company controlled by Les Bresge. After the acquisition closes, 1158478 immediately changes its name to Danbel Inc.

21 December: Danbel Inc undergoes a reverse takeover with Augusta Technologies Limited, a junior company listed on the Alberta Stock Exchange. Augusta's previous shareholders are cashed out, and it is renamed as Danbel Industries Corporation.


9 December: The TSE grants approval for Danbel to transfer its listing to that exchange.


23 August: Danbel's secured lender appoints a receiver with respect to its operating subsidiaries.

6 September: The receiver assigns most of the operating subsidiaries into bankruptcy.


15 January: The receiver assigns Danbel Inc into bankruptcy.

21 January: Trade is suspended on the TSE. Cease-trade orders issued by the OSC, BCSC and ASC would continue in effect until 4 March 2011.


16 December: Name changed to Danbel Ventures Inc.


21 December: Exit of Les Bresge from the company.


21 April: Reverse takeover, described as a "reverse three-cornered amalgamation", is undertaken with Maricann Inc, a company licensed as a medical marijuana producer since 2013. Danbel changes its name to Maricann Group Inc.

24 April: Trading of Maricann shares begins on the Canadian Stock Exchange.

This constitutes the essential details, which I doubt will be covered in detail anywhere else, and may be of use if anyone pursuing a business degree wants to investigate it further. It does disclose several fascinating aspects of how public listings can be obtained rather easily on the Canadian markets.

Throughout the documentation, there are other interesting details tying together many underlying developments over the years that would be fascinating to insiders, but I will not dwell upon them here. However, they are all publicly available for people to look at.

The corporate history of Noma is also quite fascinating in itself, and deserves a separate article. That I will come back to at another time.

12 June 2017

Why structure and design matter

All too often, managers tend to get rushed into implementing things that have never been fully thought out. While smaller decisions may be more easily reversed before the damage has fully set in, decisions implementing designs with fundamental flaws will always be messy.

For example, in the mid-1990s I was involved with a company that had achieved a reputation for performing rescue work on behalf of groups of investors in real estate limited partnerships formed in the early 1980s during the property boom that was going on back then. Among the challenges they took on was a group of investors in a condominium apartment building. I won't say where, but I'm given to understand that the given situation was used elsewhere.

Its initial formation by the promoter took on a framework similar to this:

At first glance, the concept appears to have been straightforward, but you have to keep in mind the fact that real estate has always had its share of irrational exuberance, which meant that little thought was given to what to do if things went wrong. Those of us who saw this in the early 1990s saw a lot of such disasters when prices imploded during that recession. In hindsight, it was easy to see the fatal flaws:

  • The premise given by the original promoter—who the investors subsequently kicked out, appointing us in their place—was that cash flows would be stable for the foreseeable future, and the cash distributions together with tax benefits arising from initial rental losses and annual capital cost allowance deductions would be sufficient to fund the initial payout on the promissory notes, followed by the required payments to mortgages on the individual condo units. Unfortunately, the recession later on caused occupancy rates to fall, thus restricting available cash for distribution to investors.
  • There were knock-on effects once the financial institutions started exercising their power of sale, seizing individual condo units, thus removing them from the CCA pool. This was a situation that was never envisaged in the original partnership agreement and connected financing arrangements, and the concept of stapled securities did not come onto the Canadian investment scene until the beginning of this century. The lenders did not bother to take on the related partnership interests, as the mortgages did not address that circumstance, and thus the limited partners still appeared to be part of the rental pool, thus diluting cash distributions and connected taxable income available to the investors. We had to take the position that the power of sale effectively squeezed the affected investor out of the partnership, but this was the result of a very wide interpretation of the provisions relating to voluntary withdrawals.
  • There was also a problem that had resulted from the previous history relating to cash distributions to investors. The definition of "distributable cash" that appeared in the partnership agreement only contemplated that sufficient amounts had to be held back to service current liabilities, but it was silent as to whether last month's rents were to be included in the holdback. The previous general partner decided that they were not included, and distributions were overestimated during the startup years of the LP. This became ugly when we calculated what amount was needed to make things square on the investors' withdrawal, as the overdistribution meant that we had to sent a bill for an amount that was fairly close to their pro rata portion of the LMR on hand. This proved to be rather ugly, but we did manage to collect the amounts in the end.
  • The provisions relating to voluntary withdrawal presumed that the investors would take over the underlying unit tied in to their interests, withdraw from the LP, and thereafter be free to sell it or take it on and thus become a member of the underlying condominium corporation. In the interim, the general partner would exercise control over the condominium corporation based on the units still within the partnership. Because of the powers of sale that had been exercised, the general partner was thus no longer in full control, as new owners came in and started exercising their rights as members of the corporation.
  • It didn't help matters that the condominium corporation was not properly managed before we came onto the scene, and there was a further complication in that the condominium, together with two other condominiums and another developer, controlled another condominium corporation that ran a central recreation centre!
There were other bizarre aspects to this story, but they are merely tangents in comparison to the central problems outlined here. Looking back twenty years on, especially given later developments in the legal and investing fields, the following would have greatly helped the situation:

  1.  Initial income and cash flow projections should be subject to realistic simulation and sensitivity analysis, to indicate upsides and downsides of a given investment. We have certainly come a long way since that time, but the investment prospectus still tends to be a sales tool instead of a truly informative document. Back then, they weren't even handed out to investors until after they had signed the agreements! I hope things have become more sophisticated now.
  2. The partnership and financing agreements should have addressed the issue of forced withdrawals head on. In that regard, the LP interest and underlying condominium unit should have been treated as a stapled security, and seizure under power of sale should have applied to both parts. A forced withdrawal would trigger a withdrawal from the partnership, thus giving clear title for the lender to be able to dispose, but the settlement on withdrawal would be direct with the lender, which he would have to record on the statement of adjustments that must be given to the original investor. That last item has only been recently been put in place by the courts, as some lenders had previously scooped up any cash they had collected on the sale in excess of the amount of debt in question.
  3. The cash held by the LP with respect to last month's rents should be held in escrow, and only released to apply against the last month's occupancy by the relevant tenants. This would help minimize the settlement amount due on withdrawal from the partnership and thus minimize the risk of disputes. I am unsure as to why this was not normal practice at the time, given that it appears to have been standard in many other jurisdictions.
  4. The connected condominium corporation(s) should be properly constituted once the condominium declaration has been filed. This will ensure that their funds and related reserves are kept separate from those of the limited partnership, further avoiding the risk of excess cash distributions. I have since heard too many horror stories of commingled funds that had occurred in such circumstances when segregation had not been enforced.
Other improvements could also be implemented, but the above would go a long way towards avoiding the really nasty experiences from occurring any time later on.