Reefer Brief: Dude, Where’s My Lawyer?

It’s been a while since we’ve had a good entry for our Reefer Brief feature.  This one is a pretty typical Reefer Brief episode, and it provides a nice illustration of what a default looks like.

On or about April 25, 2018, Discover Growth Fund, LLC (Discover) bought 500 shares of Series A Convertible Preferred Stock in OWC Pharmaceutical Research Corp (OWCP) for $5 million.   OWCP  is an Israel company that conducts medical research and clinical trials to develop cannabis-based pharmaceuticals and treatments.

OWCP’S shares have been trading below once cent since April 2020 (currently trading at 0).  Because OWCP failed to make certain required SEC filings, Discover was unable to convert its stock, rendering it illiquid.  It retains 381 of the original 500 shares.  Discover sued and was awarded a preliminary injunction in April 2020.  In November, 2022, OWCP’s lawyers withdrew and have not been replaced.  In May, the District Court for the Southern District of New York entered a default judgment on Discover’s breach of contracts claims in Discover Growth Fund, LLC v. OWC Pharmaceutical Research Corp.

The parties entered into two agreements relating to Discover’s stock purchase and rights related thereto.  Discover performed; OWCP did not.  The only issue was damages.  Discover sought $12 million in damages, but the court reasoned that damages in that amount would give Discover a windfall.  Under the contracts, it was entitled to 20% of the stated value of its outstanding preferred shares, $4,572,000, plus accrued but unpaid dividends, $890,391.78, plus an additional 25% due to a contractual Liquidation Preference, $1,395,597.94.   The total is about $6.8 million.  The court subsequently tacked on $1.9 million in interest.

Good luck collecting.