Tokyo Smoke

Industry: Cannabis

Areas of Focus:

Companies’ Creditors Arrangement Act (CCAA)
Cannabis Industry Restructuring
Reverse Vesting Orders
Stalking Horse Sale Processes
Franchise Law
Defense of Guarantees
Operational Restructuring
Insolvency Litigation

Legal Team:

Tokyo Smoke is one of Canada’s leading cannabis retailers, operating a national network of corporate and franchise locations.

Challenge

As the cannabis retail market became increasingly saturated, the company faced mounting operational pressure tied to rapid expansion, an expensive lease portfolio, and underperforming locations.

At the same time, the business faced a critical external threat during its restructuring process. A claim tied to a related entity sought to proceed despite ongoing protection under the Companies’ Creditors Arrangement Act (CCAA). If successful, the claim risked exposing the broader enterprise to liability, destabilizing negotiations, and undermining the restructuring process at a pivotal moment.

Method

Tokyo Smoke’s restructuring was designed to stabilize the business and preserve long-term enterprise value.

RECON guided the company through a comprehensive operational and financial restructuring strategy that:

• rationalized the company’s burdensome lease portfolio;

• wound down underperforming franchise operations;

• refocused operations around store-level profitability;

• preserved key licenses and regulatory approvals;

• executed a stalking horse sale and investment solicitation process; and

• structured a reverse vesting transaction that allowed the indirect parent company to reacquire the business and preserve its investment.

At the same time, RECON was required to litigate a novel and contested issue of whether a guarantee could be enforced during the CCAA proceeding. If allowed to move forward, the guarantee litigation threatened not only the restructuring itself, but the preservation of the brand, the regulatory framework supporting the business, and the broader enterprise value stakeholders were attempting to protect.

RECON successfully stayed the guarantee litigation by, among other things:

• positioning the Court’s broader discretionary powers under the CCAA as a mechanism to override narrow interpretations of the legislation;

• demonstrating how permitting enforcement would materially undermine the restructuring process and destabilize negotiations;

• framing the issue around preservation of enterprise value, operations, and regulatory stability; and

• advancing arguments focused on protecting the restructuring process itself—not simply defending against an isolated claim.The matter became a landmark decision addressing the novel issue of whether guarantees should be stayed during a CCAA proceeding.

Result

Through the successful completion of the stalking horse process and reverse vesting transaction, the business was ultimately preserved while allowing stakeholders to protect long-term value.

The outcome:

• eliminated a major liability threat during restructuring;

• preserved control over timing, negotiations, and restructuring execution;

• protected the broader corporate structure and enterprise value;

• preserved key cannabis retail licenses and regulatory approvals;

• avoided significant market disruption;

• allowed the business to continue operating through restructuring; and

• established an important precedent regarding the Court’s ability to stay guarantees during CCAA proceedings.