Preview
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NYSCEF DOC. NO. 31 RECEIVED NYSCEF: 07/06/2018
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Exhibit G
April 25, 2018 Letter from Ronald Lefton, Esq.
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IZOWER FELDMAN, LLP Stephanie R. Feldman, Esq.
stephanie@izowerfeldman.com
ATTORNEYS AT LAW direct: 646-448-9212
Rachel Izower-Faddé, Esq.
rizower@izowerfeldman.com
April 25, 2018 direct: 646-448-9211
Ronald D. Lefton, Esq.
VIA EMAIL leftonr@izowerfeldman.com
direct: 646-448-9239
Rafey S. Balabanian, Esq.
Edelson PC
123 Townsend Street, Suite 100
San Francisco, California 94107
rbalabanian@edelson.com
WITHOUT PREJUDICE – FOR SETTLEMENT PURPOSES ONLY
Re: Cresco Labs/Fiorello Pharmaceuticals
Dear Mr. Balabanian,
We have been retained by Fiorello Pharmaceuticals, Inc., a New York corporation, (“Fiorello”) in
connection with the current dispute between it and Cresco Labs LLC inclusive of its affiliates
(“Cresco”). I write to respond to your letter dated April 14, 2018, and to propose a path which
might lead to an amicable resolution.
As set forth below, (i) the letter of intent dated as of February 14, 2018, (the “LOI”) expired by its
terms on March 29, 2018; (ii) the LOI is no more than an unenforceable agreement to agree, (iii)
to the extent there is any obligation under the LOI to negotiate in good faith, Fiorello entirely
fulfilled that obligation but by contrast Cresco breached that good faith obligation; and (iv) Cresco
otherwise breached the LOI in material ways including but not limited to the obligation to maintain
confidentiality which Cresco has breached on numerous occasions.
THE LOI EXPIRED IN ACCORDANCE WITH ITS TERMS ON MARCH 29, 2018
The LOI expired on March 29, 2018 in accordance with its terms and, since that date, has no further
force nor effect except as to the parties’ continuing obligations as to confidentiality. The expiration
of the LOI is provided for in the section on “Timing” which unequivocally provides in clear and
unambiguous language that the “Definitive Agreement” shall be completed and executed, and due
diligence concluded, “at the earliest possible date but no later than thirty (30) business days from
the date of the execution of this LOI (unless otherwise extended by the mutual agreement of the
Parties).” The LOI execution date was February 14 and 30 business days thereafter was March 29,
2018. There has been no mutual agreement by the Parties to extend and therefore the LOI expired
according to its terms on March 29, 2018. I note that Katherine Lewis, counsel for Cresco, initially
acknowledged the expiration of the LOI.
Any suggestion that the LOI continued indefinitely is unreasonable. Obligations to negotiate in
good faith to sell a company, to the extent enforceable at all, necessarily have an expiration date.
· 85 Broad Street, Floor 18 · New York, NY 10004 · tel (646) 688-3232 · fax (646) 304-7071 ·
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Any other interpretation unreasonably presupposes both that (i) the parties will eventually reach
agreement on the many material terms of a definitive agreement and any ancillary agreements
which were not addressed, or insufficiently addressed in a letter of intent, and (ii) that any
definitive agreement will be approved by the board of directors and shareholders of the subject
corporate entities after disclosure of all material facts. Adding to the unreasonableness of such
interpretation is that there are now circumstances which raise the prospect that such approvals are
less likely. Good faith does not require engaging in negotiations that are likely to be futile.
This is particularly so in this case where the parties to the LOI, Cresco and Fiorello, are not the
essential parties to the anticipated transaction – a sale of 100% of the stock of Fiorello by the
various shareholders who own such stock. It is those shareholders who are the critical counter
parties yet the LOI makes no provision for how to assure the participation of 100% of the Fiorello
shareholders.
In this regard, the expiration date of March 29 is consistent with the provision in the “Closing”
section that looked to a closing to occur “on or about” April 15, 2018. Prior to any closing, the
Definitive Agreements would have to be approved and entered into by 100% of the shareholders
of Fiorello and thereafter, the finally agreed upon transaction would require approval by the New
York Department of Health. The “on or about” language in the section on closing is in stark
contrast to the “no later than” language for execution of the definitive agreements. The anticipated
closing date therefore also supports the conclusion that the LOI expired on March 29, 2018 by
which date the definitive agreements were to be finalized.
THE LOI IS AN UNENFORCEABLE AGREEMENT TO AGREE
First, although the LOI purports to be binding, it is no more than an unenforceable agreement to
agree with respect to a complicated acquisition which is necessarily subject not only to reaching
definitive agreements but also to (i) completion of due diligence, (ii) approval by Fiorello’s board
of directors, and (iii) agreement by all of Fiorello’s shareholders to sell their shareholdings to
Cresco. The LOI contemplates a purchase of 100% of the issued and outstanding shares of Fiorello
held by its common and preferred shareholders, none of whom are party to the LOI. The
shareholders of Fiorello are in no way bound by the LOI. Indeed the LOI is silent as to any
mechanism to obtain the participation and agreement of all the shareholders of Fiorello. The LOI
creates a construct which is not enforceable. There never was, nor could there be, any guaranty
that the board and shareholders of Fiorello would approve the execution and delivery of binding
definitive agreements with Cresco notwithstanding good faith negotiations by Fiorello and Cresco
as parties to the LOI. This is particularly so now in view of the conduct of Cresco during the
course of negotiations, and material changes to the business environment in which Fiorello and
Cresco operate that suggests that the purchase price for Fiorello shares as reflected in the LOI may
no longer reflect the intrinsic value of Fiorello that its board is required to obtain.
Second, the LOI is incomplete by omitting terms and details that would be essential to any
definitive agreement contemplating the sale of a company. This is most apparent in context of the
contemplated installment payment of the purchase price and the potential additional contingency
payments. The terms of the contemplated promissory notes are left for further negotiation
including, but not limited to, the rate of interest to be paid. A mere reference to “customary rates”
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is far too vague to be enforced.
In addition, the option of each shareholder to take Cresco equity instead of cash is not sufficiently
detailed in various ways, including but not limited to the essential elements of what form that
equity would take and the rights attendant thereto, valuation, provision by Cresco to each Fiorello
shareholder of information in advance of each option exercise period, and implementing a tax free
exchange. For instance, the phrase in the LOI referring to a pending “material capital raise” is
vague and ambiguous and would necessarily require further negotiation and specification.
Similarly, there was no meeting of the minds regarding what the valuation was to include. This
manifested in the dispute as to whether to include the value of Fiorello (as acquired by CLNY) in
the valuation for the initial and the installment payments.
Cresco itself has acknowledged the tax structure as a “gating issue” which must be resolved in
context of the option of the Fiorello shareholders to rollover into Cresco equity rather than take
cash. Moreover, there was no agreement as to the content of information to be provided to
shareholders to consider their option to take equity rather than cash nor of the procedure and timing
of providing that information and election.
Third, there was no agreement as to who would actually be party to the SPA. The suggestion by
Cresco of a shareholder representative was itself fraught with ambiguity and new issues for which
there was no agreement.
CRESCO’S LACK OF GOOD FAITH
I acknowledge your contention with respect to best efforts in the LOI section on Timing, and note
Cresco’s own breaches of that requirement. Among other things Cresco failed to pay the good
faith deposit of when due. Instead a week after payment was due Cresco for the first
time insisted on an escrow agreement that was not contemplated by the LOI. Despite its belated
new demand, Cresco was unable to secure an escrow agent. Fiorello was required to make the
necessary escrow arrangements to facilitate the payment Cresco was obligated to make. This two
week delay caused by Cresco impaired the parties’ ability to finalize definitive agreements within
the 30 business day deadline.
Further, despite repeated requests by Fiorello, Cresco inexplicably delayed preparing and
submitting both a due diligence list and a first draft of a stock purchase agreement. Given the
months of negotiation that preceded execution of the LOI and customary practice Cresco should
have been prepared and ready to deliver its due diligence list and usable drafts in connection with
the LOI itself. Instead, a due diligence list was not provided by Cresco until March 1, and a draft
stock purchase agreement was not transmitted in any usable form until March 8 and at that time
did not include a form of promissory note. Although you refer to a March 1 draft, it was in the
nature of an asset transaction with pages devoted to irrelevant working capital adjustments. Cresco
acknowledged that its draft had to be reworked and would produce a new draft. That was the
March 8 draft – essentially the first workable draft definitive agreement. Even then, however,
Cresco failed to provide critical draft transaction documents including a draft consulting agreement
and the form of promissory note to be delivered to each shareholder.
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When a proposed note finally was delivered on March 15, 2018 - approximately a month after the
LOI was executed - itwas incorrect and wholly inadequate. The LOI clearly states that each
payment would be payable in cash to Fiorello shareholders or, at the election of each shareholder,
in Cresco equity. This necessarily requires individual promissory notes to be issued to each
Fiorello shareholder in accordance with their pro rata interest, yet this was not provided. Moreover,
the draft note incorrectly deemed the failure to elect to allow a payment in Cresco equity when it
was to be in cash. Counsel for Fiorello immediately contacted Cresco’s counsel about the
inadequacies of the draft note. Cresco counsel acknowledged same and the need to have a much
more detailed note reflecting the obligation of Cresco in the SPA. Nevertheless Cresco never
provided a revised draft.
Nor was there any provision for how Cresco might proceed if less than 100% of the shareholders
agreed to sell their shares. The LOI also is silent on this critical issue further demonstrating that
it is merely an agreement to agree.
Emblematic of Cresco’s delay and lack of attention to the proposed transaction was its failure to
even form Cresco Labs New York LLC – the purported acquisition entity - until mid-March 2018
despite Fiorello’s request. Because of New York’s statutory six week publication requirement it
would have been impossible to close the transaction by April 15, 2018 as provided for in the LOI.
FIORELLO ACTED IN GOOD FAITH AT ALL TIMES
Your contention that Fiorello improperly delayed is without foundation. Fiorello promptly
prepared the due diligence drop box and began making due diligence documents available on or
about March 1, 2018. By March 9 Fiorello had populated the drop box with over 1000 documents
and continued to supplement it as appropriate and as requested. The March 9 date reflects Cresco’s
failure to earlier provide a due diligence list despite repeated prior requests by Fiorello. Similarly,
not responding to repeated requests by Fiorello, Cresco did not provide its investor deck to Fiorello
until March 19, 2018. Upon review of that deck it became immediately apparent that it was not
current in terms of market conditions and other information necessary to consider in terms of any
capital raise. This was a critical failure in terms of the rollover option to take Cresco equity instead
of cash thereby further highlighting the lack of any meeting of the minds on how to implement
that concept. By March 26 Cresco had still not completed its due diligence review and it later
indicated it required up to an additional three (3) weeks to complete due diligence and address
outstanding transaction issues.
Cresco’s lack of attention to its due diligence obligations was further demonstrated by first
rescheduling the planned two day site visits and then when the visits occurred the Cresco
representatives were preoccupied with other business unrelated to the site visit or general due
diligence. Their conduct was extremely unprofessional and off putting to Fiorello. The Fiorello
representatives had put much effort into arranging and conducting the site visits and the disinterest
exhibited by Cresco representatives further revealed a more general lack of interest in proceeding
with Fiorello on any good faith basis. Also demonstrating the lack of good faith by Cresco was
the repeated failure of its legal team to return calls, its cancelling of meetings to attend to other
unrelated matters, its general non-responsiveness and lack of attention to deal issues and detail.
This was concerning because of the installment nature of the purchase price coupled with the four
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year contingency pertaining to New York Adult Legalization. It was further concerning because
it demonstrated that, like the last minute change to the consulting agreement, discussed below,
Cresco intended to wait until a last minute critical juncture to coerce Fiorello into an even less
favorable transaction.
There are other examples of both Fiorello’s good faith performance and Cresco’s failure not only
to use best efforts but even to act in good faith. For instance:
• In anticipation of the consummation of the SPA, Fiorello put a Phase 1 financing
commitment on hold and did not proceed with its own operation and development plans.
The failure to reach definitive agreements with Cresco by March 29, 2018 has impeded
Fiorello’s development.
• Fiorello could have terminated the LOI for Cresco’s breach of its payment obligation, but
instead accepted the late payment and incurred the additional cost of negotiating the escrow
agreement.
• Cresco, prior to executing the LOI, circulated draft terms of the consulting agreement
providing for monthly payment of $20,000 as requested by Ms. Yoss and Mr. Sirota. Then
at the last minute, and after the consulting agreement term sheet and related LOI had been
approved by the Fiorello board, Cresco redealt and reduced the monthly consideration to
$6,000. Ms. Yoss and Mr. Sirota agreed because of their overriding fiduciary duties to the
other Fiorello shareholders but the incident was a signal of the character of Cresco.
Unfortunately, there were further signals. Among them was that although Fiorello honored its
obligations with regard to confidentiality and exclusivity, Cresco did not. As set forth below
Cresco materially breached these obligations.
On March 26 Fiorello delivered detailed schedules ancillary to the draft SPA. Preparing these
schedules, which were called for by the draft SPA delivered by Cresco, required a substantial
amount of effort and work. In addition, on March 26 Fiorello again advised Cresco of the
numerous defects in the proposed note and made redline comments on the draft SPA. At that time
there were many open and still unresolved issues including but not limited to the tax structure,
details on the rollover option including what information Cresco would be required to provide and
when, how to value Cresco, and the parameters of a possible capital raise that would affect such
valuation. In that regard, Cresco still had not updated its investor deck for analysis by Fiorello.
By March 29 it was plain to all parties that material essential terms had not been agreed upon and
that due diligence had not been completed. It was only in this context that Fiorello notified Cresco
that the LOI had expired in accordance with its terms. Moreover, despite its willingness to consider
a new LOI the exclusivity period was necessarily over.
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CRESCO’S MATERIAL BREACHES OF THE LOI CONFIDENTIALITY PROVISIONS
In the meantime, Fiorello has learned of further intentional and material breaches by Cresco of its
obligations under the LOI. In particular Cresco has breached its obligations of confidentiality in
several ways. First, in an interview with an industry publication Cresco announced its imminent
entry into the New York market. Within the industry – and to the New York Department of Health
- it was easy to discern that Cresco was pursuing Fiorello. To gain entry to the New York market
Cresco would need a license. Of the 10 New York State licenses only two are possible targets;
Fiorello and one other. This improper disclosure by Cresco has put Fiorello in a difficult situation
with the Department of Health and with its own shareholders.
Second, notwithstanding the parties’ agreement that Cresco would not seek financing until after a
definitive agreement was executed, it appears that Cresco may already have reached out to
potential investors with a deck that includes inaccuracies and inconsistencies.
Third, certain unsolicited offerors have indicated knowledge of negotiations between Fiorello and
Cresco. This did not come from Fiorello and has potentially prejudiced Fiorello. It is inferred that
the leak of the confidential negotiations must have come from Cresco.
Finally, and exacerbating its public announcement, Cresco has communicated directly with
Fiorello shareholders. Cresco discussed the proposed transaction, presented its viewpoint, and
threatened litigation. Moreover, Cresco further threatened that it would interfere with Fiorello’s
NY DOH license. The damages to Fiorello of any such improper action by Cresco are substantial
and Fiorello would have no choice but to hold Cresco accountable. This is a flagrant breach of
the surviving confidentiality provisions calculated to pressure Fiorello management
notwithstanding their fiduciary duties. This improper conduct by Cresco materially interferes with
the relationships between Fiorello management and its shareholders, as well as with the NY DOH.
It further reflects negatively on the character of Cresco which seeks to be business partners with
Fiorello shareholders.
It is imperative that Cresco not again breach its confidentiality obligations and immediately cease
and desist from contacting any Fiorello shareholder.
CHANGES TO THE BUSINESS ENVIRONMENT THAT AFFECT THE INTRINSIC
VALUE OF FIORELLO
President Trump has recently announced that the United States Justice Department would not
interfere with determinations by individual States as to the legalization of marijuana use. This
reversal of the position previously taken by Attorney General Sessions had an immediate and
explosive impact on the market and the value of the license currently held by Fiorello. As a
consequence it appears to the Fiorello board, and will likely appear to Fiorello’s shareholders, that
the consideration set forth in the LOI is now significantly below fair market value. Moreover,
Fiorello has received several unsolicited offers from other prospective purchasers. Although
Fiorello has not entered into letters of intent with any such offeror, Fiorello, nevertheless, now
perceives a market interest at a price higher than that contained in the Cresco LOI. Although we
do not suggest that Cresco must increase its proposed purchase price, we note that any proposed
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definitive agreement would be submitted to shareholders for approval and agreement together with
a disclosure of the background of any proposed transaction, market conditions, and the unsolicited
receipt of other offers as well as management’s opinion as to value.
YOUR LETTER MISCHARACTERIZES THE RELEVANT FACTS AND
MISAPPREHENDS THE APPLICABLE LAW
As set forth above, the suggestions in your letter that the LOI is enforceable is incorrect.
Furthermore your contention that Fiorello has not acted in good faith is not only belied by
Fiorello’s performance but is rebutted by the bad faith conduct of Cresco which frustrated any
possibility of reaching definitive agreements prior to the expiration of the LOI on March 29, 2018.
Finally, your reliance on the Delaware SIGA case is misplaced and your characterization of likely
damages is unlikely. SIGA decision has not been adopted in New York and it is unique to its
facts which are not here apposite or relevant. The standard in New York is to award reliance
damages. In this regard, the costs and expenses that Fiorello would seek to recover from Cresco,
as well as damages for Cresco’s breach of its confidentiality obligations are extremely high.
PROPOSAL FOR AN AMICABLE RESOLUTION
Solely in response to your letter dated April 14 Fiorello has retained my firm as litigation counsel.
It also has retained additional corporate counsel. Fiorello and Cresco share an interest in resolving
these disputes on an amicable basis. In that connection I have been authorized to make the
following proposal on a without prejudice basis and for settlement purposes only.
The principals of Cresco and Fiorello, together with their respective counsel, will meet for a five
(5) business day period at the offices of Greenberg Traurig, LLP in New York City, 200 Park
Avenue, for the purpose of finalizing all definitive agreements for Cresco’s purchase of 100% of
the stock of Fiorello. If the parties are able to finalize the definitive agreements within such five
(5) business day period, Fiorello will then submit the definitive agreements to its board and
shareholders for approval. In doing so Fiorello will, as required by statutory and common law,
make full and fair disclosure to its board and its shareholders of (i) the facts and circumstances
leading to the finalization of the definitive agreements being submitted, including the views of the
board of directors and management of Fiorello with respect to Cresco’s conduct to date, (ii) the
changes that have occurred in New York, the industry, and the general business environment after
execution of the LOI, (iii) the unsolicited receipt of indications of interest by other offerors and
the material terms and status of each, (iv) the views of the board and, if appropriate, external
financial advisors, as to whether the proposed purchase price in the LOI fairly reflects the current
intrinsic value of Fiorello, and (v) any other facts, circumstances, and other information deemed
by the board and management of Fiorello to be material to the Fiorello shareholders’ investment
decision.
The above proposal is conditioned upon the exchange of mutual releases and waiver of all claims
that might have arisen prior to the date of such release and waiver. We propose Monday April 30
as the beginning of the negotiation and drafting period with all definitive agreements to be finalized
by 6 PM, Eastern, on May 4, 2018. If you agree with the foregoing the mutual waiver and release
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of claims must be executed and delivered by the parties by 5pm Eastern on April 27, 2018. From
the date of your agreement throughout May 4, 2018, there shall be no litigation nor preparation for
litigation, and Fiorello will not negotiate with any other parties regarding the possible sale of
Fiorello. Should Cresco agree it should forward revised drafts of all definitive transaction
documents no later than noon on April 27, 2018.
Your client has communicated with at least one Fiorello shareholder indicating its desire to resume
negotiations to reach definitive agreements. It is our hope that a concentrated drafting session will
resolve all disputes and provide a firm foundation for moving forward. If however no definitive
agreement is reached then the parties will go their separate ways with no surviving claims.
In view of your client’s threat of litigation, please be sure to send a comprehensive document hold
letter to your client and its corporate counsel, Ms. Lewis and her firm, that includes, but is not
limited to, all documents pertaining to the LOI, the proposed transaction, communications with or
relating to Fiorello, valuation analyses of Fiorello, valuations of Cresco, capital raises by Cresco
from October 2017 through the present, and any and all subjects that are relevant to the claims you
have asserted, the contents of this letter, and any possible transaction between Cresco and Fiorello.
Because of the need of Fiorello to proceed with its own development and to further the interests
of its shareholders I ask that you respond within 48 hours of receipt of this letter.
Very truly yours,
/s/ Ronald D. Lefton
Ronald D. Lefton, Esq.
cc: Michael Helsel, Esq. (via email)
Joseph Lucosky, Esq. (via email)