Charlotte’s Web to Swap Debt for Equity as British American Tobacco Becomes Top Shareholder

Charlotte’s Web Holdings, the Colorado company that helped push cannabidiol into the American mainstream, is handing a tobacco multinational a powerful new role in its future as it fights to repair its balance sheet and position itself for an emerging federal health program.

On April 1, the hemp-derived wellness company disclosed that a subsidiary of British American Tobacco plc (BAT) will convert a large, existing debt stake into equity and inject fresh cash, leaving Charlotte’s Web with no long-term debt but sharply diluting existing shareholders and elevating BAT to its dominant owner.

Under a subscription agreement dated March 30 and filed with the U.S. Securities and Exchange Commission, BT DE Investments Inc., BAT’s Delaware-based investment arm, agreed to invest $10 million in new equity and convert a C$75.3 million (about $54 million) convertible debenture issued in 2022 into common shares at a revised, lower price.

If shareholders approve, BAT’s holding would jump to roughly 40.8% of Charlotte’s Web’s outstanding shares, transforming the British cigarette maker from a major creditor with potential equity upside into the CBD company’s largest shareholder with significant governance rights.

The company expects the transaction to close on or around May 28, subject to shareholder and regulatory approvals, including from the Toronto Stock Exchange.

“We are taking a major step to strengthen our capital structure and unlock the company’s potential,” Charlotte’s Web Chief Executive Bill Morachnick said in a news release announcing the deal. He called it “both a balance sheet event and a strategic affirmation of our partnership with BAT,” adding that eliminating the debenture “removes our largest remaining liability and strengthens our shareholders’ equity.”

Debt erased, dilution deepens

The arrangement has two main parts.

First, BAT will purchase $10 million of new Charlotte’s Web common shares. The exact number of shares will be calculated at closing using a price per share in Canadian dollars equal to the greater of C$0.94 and the maximum discount to market allowed under TSX rules, based on a five-day volume-weighted average price.

Second, Charlotte’s Web will amend the terms of BAT’s unsecured convertible debenture issued in November 2022 and then convert it in full. The debenture, with a principal amount of C$75,341,080 and 5% annual interest, was originally convertible at C$2.00 per share, with BAT’s ownership capped at 19.9% unless shareholders approved a higher ceiling.

Under the new agreement, the conversion price will be reduced to C$0.94 per share for both principal and accrued interest. The ownership cap will rise to 40.8% of Charlotte’s Web’s post-transaction share count on a non-diluted basis. BAT has agreed to convert the entire debenture immediately after the amendment becomes effective.

At the revised price, the company said, the debenture and accrued interest will convert into approximately 95.3 million common shares. Combined with up to 14.8 million shares from the $10 million subscription, Charlotte’s Web expects to issue about 110 million new shares to BAT.

Charlotte’s Web currently has 159.7 million common shares outstanding. After the deal, it projects about 269.7 million shares will be outstanding, with BAT owning 95.3 million, or about 40.8%, on a non-diluted basis.

Erika Lind, the company’s chief financial officer, said the transaction will eliminate roughly $65 million of total debt and save about $12 million of future interest costs that would have accrued through the debenture’s 2029 maturity.

“In combination with the cost reductions and operational efficiencies we’ve achieved over the last two years, this recapitalization leaves us with no long-term debt and greater flexibility to fund our priorities,” Lind said in the release.

The shift comes at a steep price for existing investors: a roughly 69% increase in the share count, and a concentration of nearly half the equity in one shareholder. The board, however, argued that with Charlotte’s Web’s share price trading far below the original C$2.00 conversion price, BAT had little incentive to convert voluntarily in the near term, leaving a sizeable liability and interest burden on the company’s books.

Board seats and veto rights

Alongside the financial restructuring, BAT and Charlotte’s Web negotiated a new governance framework that will give the tobacco group a stronger, though not absolute, hand in corporate decisions.

An amended and restated investor rights agreement, to be executed at closing, will allow BAT to nominate directors to Charlotte’s Web’s board in proportion to its partially diluted ownership, but never fewer than two as long as it holds at least 10% of the company’s equity on a partially diluted basis. If its stake falls below that threshold, BAT’s nomination rights will lapse.

BAT will also gain demand and “piggyback” registration rights, allowing it to require Charlotte’s Web to file a prospectus to facilitate resale of its shares in certain circumstances, subject to minimum size and timing limits.

The agreement grants BAT pre-emptive rights to participate in most future equity offerings to maintain its ownership percentage and “top-up” rights to restore its stake if Charlotte’s Web issues securities in some exempt transactions where BAT cannot participate at the outset.

At the same time, BAT agreed to restrictions aimed at reassuring other shareholders it will not quickly move to outright control or flip its stake. For two years after the new agreement takes effect, BAT will be subject to a standstill prohibiting it from acquiring additional securities that would take its ownership to 49% or more on a partially diluted basis, launching unsolicited takeover bids or business combinations, or engaging in proxy contests without the company’s consent.

For 18 months, BAT also committed not to transfer its shares, with exceptions for transfers to affiliates, sales into a bona fide takeover bid or court-approved plan of arrangement, and certain legal or contractual triggers.

The investor rights agreement also gives BAT a say over some major corporate moves. As long as it holds at least 10% of Charlotte’s Web’s partially diluted equity, the company will need BAT’s consent to voluntarily liquidate or wind up, to issue securities that rank senior to common shares, to delist from the TSX or the over-the-counter market in the United States, or to incur more than $10 million in new debt for borrowed money.

Shareholder vote and regulatory approvals

Because BAT’s ownership will exceed prior limits set in its debenture and TSX policies, the transaction requires approval from Charlotte’s Web shareholders and regulators.

The company’s Form 8-K, which also serves as soliciting material for a shareholder vote, states that Charlotte’s Web will file a preliminary and then definitive proxy statement on Schedule 14A with the SEC. Shareholders of record as of April 6 will be entitled to vote on the deal at a meeting to be scheduled.

The agreement contains customary conditions to closing, including absence of a material adverse change, various regulatory approvals, and a provision for a termination fee payable in certain circumstances if the transaction does not proceed. The specific amount of that fee was not highlighted in the company’s summary.

Medicare pilot looms over strategy

Charlotte’s Web is tying the recapitalization to a significant policy shift in Washington that could, for the first time, bring hemp-derived cannabinoid products into a federal health care program.

On March 20, the Centers for Medicare & Medicaid Services’ Innovation Center issued guidance for a new “Substance Access Beneficiary Engagement Incentive,” or BEI, model. The guidance allows participating Medicare plans in certain demonstration projects to provide full-spectrum hemp products containing up to 3 milligrams of THC per serving as incentives to enrollees who meet specified conditions.

Charlotte’s Web welcomed the move in a separate statement, saying the pilot “represents an important first step toward integrating evidence-based full-spectrum hemp products into the Medicare environment.” The company said it anticipates participating in the model and will use some of the proceeds from the BAT deal to support that effort and an ongoing Phase 2 clinical trial program in partnership with Ajna BioSciences.

“We believe this transaction positions us to compete effectively for opportunities created by the BEI guidance and to advance our clinical research efforts,” Morachnick said.

The pilot comes amid continued regulatory uncertainty for CBD and hemp derivatives. Although the 2018 Farm Bill removed hemp — defined as cannabis containing no more than 0.3% delta-9 THC by dry weight — from the federal list of controlled substances, the Food and Drug Administration has said existing frameworks for dietary supplements and foods are “not appropriate for cannabidiol” and has asked Congress to create a new regulatory pathway.

At the same time, lawmakers have advanced language in federal spending legislation that would sharply cap THC content in hemp-derived products at 0.4 milligrams per container starting in late 2026, a limit that industry groups say would effectively eliminate many full-spectrum formulations. That proposed cap, if enacted, could conflict with the BEI model’s current allowance of up to 3 milligrams of THC per serving.

Big Tobacco’s expanding cannabis footprint

For BAT, the deeper move into Charlotte’s Web extends a broader strategy to diversify beyond traditional cigarettes into new nicotine and non-nicotine categories. The London-based company, founded in 1902, has built portfolios in vaping, heated tobacco and oral nicotine products, and has increasingly turned to cannabis-adjacent investments.

In 2021, BAT took a substantial minority stake in Canadian cannabis producer Organigram Holdings Inc. In 2022, it provided Charlotte’s Web with the seven-year convertible debenture that is now being exchanged for equity.

BAT has described its transformation plan under the banner “A Better Tomorrow,” emphasizing what it calls reduced-risk products and new categories. The Charlotte’s Web transaction gives it a major equity foothold in a U.S. hemp-derived wellness brand with visibility among consumers, retailers and health practitioners.

Public health advocates have previously warned that large tobacco companies could seek to dominate emerging cannabinoid markets, raising questions about marketing practices, youth exposure and the direction of product research. Supporters of strategic investment argue that well-capitalized, heavily regulated multinationals can bring higher manufacturing and compliance standards to an industry long marked by uneven quality control.

A test for shareholders — and for the CBD market

Charlotte’s Web’s shareholders must now decide whether the benefits of a clean balance sheet and a committed strategic backer outweigh the costs of dilution and concentrated influence.

The company’s market capitalization stood at roughly $139 million around the time the deal was announced, according to market-data services, making BAT’s approximate $75 million equity commitment unusually large relative to the issuer’s size. In effect, the restructuring resembles a quasi-recapitalization led by a single strategic investor rather than a conventional follow-on offering.

However they vote, investors in Charlotte’s Web and its peers will be watching what follows: whether the CMS pilot moves forward as envisioned, whether Congress pursues or revises proposed THC caps, and whether other capital-starved hemp and CBD companies seek similar lifelines from global tobacco, pharmaceutical or consumer-goods firms.

For Charlotte’s Web, whose name became synonymous a decade ago with a child’s fight against intractable epilepsy, the outcome will help determine who shapes the next chapter of American cannabinoid wellness — and on whose terms.