ASH Group of Florida Inc. v. Flora Growth Corp.

Background

The plaintiffs included ASH Group of Florida, Inc., Just Brands USA Inc., FMMD Network, LLC, SSGI Financial Services, Inc., and Mitha Management Group LLC. Hassan Rakine acted as the sellers’ representative. The defendants were Flora Growth Corp. and Flora Growth U.S. Holding Corp.

Under a purchase agreement effective February 24, 2022, Flora Growth U.S. Holding Corp. acquired all equity interests in Just Brands and High Roller, which together owned the JustCBD brand and related operations. The agreement required $16 million in cash and 9.5 million shares of Flora Growth Corp. stock, subject to adjustments. It also contained an additional-shares provision intended to provide $47.5 million in share consideration if the stock price did not reach a specified level, as well as protections against dilution.

The plaintiffs alleged that the defendants had made false statements about their cannabis-growing costs, research and development, farming operations, and expected financial growth. They also alleged that the defendants failed to issue additional shares and cash required under the purchase agreement and failed to release escrowed shares. The plaintiffs further alleged that the defendants did not disclose their asserted liability in later public filings.

Defendants’ Motion

The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which allows dismissal when a complaint does not state a legally sufficient claim. The plaintiffs brought a federal securities claim under Section 10(b) of the Securities Exchange Act and Rule 10b-5, along with common-law claims for breach of contract, breach of the duty of good faith and fair dealing, and fraud.

For the securities claim, the plaintiffs’ theory was that the defendants promised to provide the additional share consideration while secretly intending not to do so. The court explained that a failure to keep a promise ordinarily supports a contract claim, not securities fraud. To support securities fraud, the plaintiffs had to plead particular facts creating a strong inference that the defendants intended not to perform, or knew they could not perform, when they made the promise.

Federal Securities Claim

The court dismissed the federal securities claim without prejudice. It found that the defendants’ failure to issue the additional consideration, by itself, was not enough to show fraudulent intent. The plaintiffs’ allegations about the defendants’ cannabis costs, research and development, and farming operations might suggest that the defendants lacked the claimed business capabilities, but they did not show that the defendants had already decided not to provide the promised share consideration when the purchase agreement was made.

The court also rejected reliance on a later prospectus that allegedly failed to disclose the additional-share obligation. The court stated that events occurring after an alleged misstatement generally do not establish the defendants’ intent at the time of the earlier statement. The court concluded that, taken together, the allegations did not create the required strong inference of fraudulent intent.

Common-Law Claims and Jurisdiction

The court then addressed the state-law claims. Because the federal securities claim had been dismissed, the court considered whether it had diversity jurisdiction, which generally requires every plaintiff to be a citizen of a different state from every defendant.

The plaintiffs alleged that they were Florida residents, that Flora Growth U.S. Holding Corp. was a Delaware citizen, and that Flora Growth Corp. was an Ontario corporation that listed a Fort Lauderdale, Florida address as its principal executive office. The plaintiffs argued that Flora Growth Corp. was not a Florida citizen, citing allegations about its officers, its former reported office, and the location of its operations. But the amended complaint also alleged that the company had reported a correct office address and that one director lived in Florida.

The court concluded that the allegations did not establish, by the required evidentiary standard, that Flora Growth Corp. was a citizen of somewhere other than Florida. Although the defendants had not moved to dismiss for lack of subject-matter jurisdiction, the court determined that the plaintiffs had not adequately alleged jurisdiction over the common-law claims. It dismissed those claims without prejudice.

Leave to Amend and Disposition

The court granted the plaintiffs leave to file a second amended complaint because the case was at an early stage and the alleged defects might be corrected with additional facts. The court ordered the plaintiffs to file that complaint within 30 days. The defendants could seek a conference about another anticipated dismissal motion within 14 days after the second amended complaint was filed.

Judge Andrew L. Carter, Jr. therefore granted the defendants’ motion to dismiss the amended complaint without prejudice, dismissed the federal securities claim without prejudice for failure to state a claim, dismissed the common-law claims without prejudice for inadequate allegations of subject-matter jurisdiction, and granted leave to amend.