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The parent companies of cannabis producer Pure Sunfarms, Village Farms and Emerald, have entered a dispute over the ownership of the joint venture and pending payments.

The ongoing clash between two Canadian cannabis companies heats up after a dispute has broken over the ownership of a joint venture (JV).

On Tuesday (November 26), Village Farms International (NASDAQ:VFF,TSX:VFF) confirmed it had secured a majority stake in Pure Sunfarms, the 50/50 JV originally founded with cannabis producer Emerald Health Therapeutics (TSXV:EMH,OTCQX:EMHTF).

Village Farms claims since Emerald failed to pay a C$5.9 million payment to Pure Sunfarms earlier this month, Village Farms ponied up an additional equity contribution on November 19, thus increasing its stake in the JV.

Shares of Emerald fell 4.8 percent over the trading day on Tuesday and prices sit at C$0.40 as of 1:06 p.m. EST. Village Farms fared much better on the open market with an increase of 5.9 percent to C$8.80 as of 1:15 p.m. EST.

Emerald was to pay C$5.9 million to Pure Sunfarms by November 1, according to the firm, after which Pure Sunfarms sent a default notice to Emerald. Village Farms first notified investors about the default on November 19.

The news wasn’t well received by Emerald, which then fired back at its partner in a press release sent out on November 20, saying that, in fact, it still held its remaining 50 percent stake in the JV and that Village Farms didn’t have the right to acquire additional shares of Pure Sunfarms under the shareholder agreement.

Riaz Bandali, Emerald CEO, said in the November 20 statement he was shocked to learn of Village Farms’ equity contribution.

“We can’t speculate on Village Farms’ motivation for making this irresponsible and inaccurate claim, but we want to reassure investors that there has been no change in ownership of (Pure Sunfarms),” he said. “We are disappointed at the aggressive approach of Village Farms in this matter; however, we continue to believe that cooler heads will prevail.”

According to Emerald, the only case where Village Farms can take on more of its share of the JV is when Emerald defaults on a contribution notice from Pure Sunfarms. No such notice was issued, the company claims, meaning that Emerald is in the clear.

Village Farms doesn’t see it that way and said Emerald’s release was based on “a material misunderstanding of the relevant legal agreements,” adding that Pure Sunfarms confirmed the Village Farms equity contribution to the JV has been credited to Village Farms under the terms of its shareholder agreement.

Village Farms also noted it was seeking the cancellation of 5.94 million common shares of Pure Sunfarms, shares that were originally placed in escrow as a result of Emerald’s defaulted payment.

Emerald will come away with a reduced stake in Pure Sunfarms once an arbitrator gives the share cancellation the green light, Village Farms said.

Emerald took issue with the matter of escrowed shares as well, saying that it had first agreed to advance C$25 million to Pure Sunfarms and certain shares of the JV were to be released once Emerald paid off the amounts it owed as a part of the Delta 2 facility option agreement.

Of the C$25 million owed, Emerald said it had already paid C$17.41 million to Pure Sunfarms but decided to set off C$5.94 million using a portion of a C$13 million debt Pure Sunfarms needed to pay to Emerald under their principal amount shareholder loan.

Emerald took the fight to Pure Sunfarms as well after it billed the JV for the C$13 million loan — with interest — on November 20.

Neither Emerald nor Village Farms responded to a request for comment.

Emerald and Village Farms deal with ongoing conflict over JV

The evenly split JV agreement between Village Farms and Emerald dates back to 2017 when the pair said they would be teaming up to create a company with the goal of being the lowest-cost cannabis producer in Canada.

Village Farms initially put up a 1.1 million square foot greenhouse as a part of the deal. Emerald, for its part, initially contributed a total of C$20 million in cash — C$18 million of which was given out with the satisfaction of certain milestones.

Emerald then signed a supply agreement with the JV, which would become Pure Sunfarms, in 2018. The agreement stated Emerald would purchase 40 percent of Pure Sunfarms’ production in 2018 and 2019 at a predetermined price-per-gram of cannabis.

The supply agreement was at the core of the first rumblings of the dispute that started in October. Village Farms told investors Emerald wouldn’t pay an approximately C$7 million for a “price deficiency obligation” fee, which Pure Sunfarms said it was owed from Emerald.

The supply agreement states that, though Emerald agreed to buy 40 percent of Pure Sunfarms’ production, in the instance when it doesn’t Pure Sunfarms is free to sell the product on the open market instead.

As part of the deal, Emerald is required to pay the JV the difference between the predetermined price of marijuana and the market price if the market price is lower than the originally agreed-upon price, allowing Pure Sunfarms to cover its operating costs.

Emerald, however, hit back in its own statement saying that it was not liable for the payment “due to the manner in which the Joint Venture conducted its recent cannabis sales” and was well within its right to reject the product from Pure Sunfarms.

The dispute was set to be discussed in a meeting of the board of directors for Pure Sunfarms sometime after the release of the update.

Don’t forget to follow us @INN_Cannabis for real-time news updates!

Securities Disclosure: I, Danielle Edwards, hold no direct investment interest in any company mentioned in this article.

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