Canadian cannabis company Canopy Growth Corp. stunned the market Wednesday with news that co-Chief Executive Bruce Linton is stepping down from his role and will leave the board, and counterpart Mark Zekulin is next.

Linton admitted Wednesday that he was terminated by the board, while Zekulin later told Bloomberg News that he would leave Canopy Growth CGC, -2.52% WEED, -1.26% , the world’s largest cannabis company, once it had located a suitable replacement for the top job. Canopy Growth confirmed that Zekulin would only serve until a new CEO was found, in a statement to MarketWatch.

The departure of the two long-serving executives came eight months and two days after Corona beer distributor Constellation Brands Inc. STZ, -0.55% took over four of Canopy’s seven board seats, one of which was occupied by Linton himself. In an interview with MarketWatch early Wednesday, Linton acknowledged that he and Zekulin had discussed the very risk of being ousted from the company they founded but determined that the $4 billion Constellation brought to the table was too valuable to pass up.

“It went from a board of all independents to a board which is really four Constellation folks, and three that are not,” Linton said. “The new governance group created some interesting dynamics … but nobody else [other than Constellation] was writing the first check and then moved boldly with the second check, and that’s what moved them into the driver’s seat.”

Without the two co-CEOs, it’s an open question what the company’s future will hold and how much it will depart from the vision outlined by the two men — such as handing out stock options to every employee of the company, likely selling some of the first grams of legal pot in Newfoundland and basing its operations in the small town of Smiths Falls, Ontario. Smiths Falls has gone through something of a renaissance since Canopy Growth has expanded operations there, employing hundreds of people in a town that had fallen on hard times after a chocolate maker pulled out.

Linton says Canopy Growth is in such an enviable position that its main challenge in replacing him will be sorting through the massive number of candidates he expects will apply for the role.

“There’s no one who is competent on the planet that isn’t going to apply for the job,” he said.

Constellation’s takeover of the board is what led to Linton’s firing, he said. The ouster left him hurt and disappointed, but he said it was not the first time he has been asked to leave a company he helped build.

“It’s hurtful to be ejected from the thing you created,” Linton told MarketWatch over the phone Wednesday, acknowledging that his departure is not voluntary. “The part that’s disappointing to me is to be out of the company, but this is not the first time I’ve been fired as a founder. It’s an evolution I didn’t welcome.”

Investors and others involved in the cannabis sector told MarketWatch that while Linton served an important role, Constellation likely believed that it was time to bring in executives with a longer record of running mature companies.

“In entrepreneurship and venture, the role of the entrepreneur is often seen as starting and scaling the business to a point where a transition to a manager more suited to growing and managing a mature business happens,” Daniel Sax, chief executive of Sensi Properties, a real-estate investment company focused on pot, said in an emailed message.

“It’s clear here that Constellation saw that they could no longer wait for that transition to take place, especially given the recent heat over earnings they were getting. It is not an indictment of Bruce’s leadership, but rather a harsh reality of entrepreneurship and bringing in a large investor such as [Constellation] with an institutional mind-set.”

Linton has been a very public face for Canopy — and for legal cannabis — and has given multiple interviews to publications across the globe telling the company’s story. Canopy was founded in 2013 and commands a market cap of almost $14 billion.

“I think most people don’t know how much I’ve actively been the rational voice globally,” Linton said.

Linton told MarketWatch that he now plans to focus on two software businesses that he’s involved with, Martello Technologies Group Inc. DRKOF, -6.29% MTLO, -2.27% , which is publicly traded, and Ruckify Inc., a startup.

Investors viewed the departure as a difficult decision.

“Bruce has been a pioneer in the industry and it will be tough to see him go,” Korey Bauer, portfolio manager of the Cannabis Growth mutual fund CANNX, -1.60% launched by Foothill Capital Management, said Wednesday.

Matt Hawkins, managing partner with cannabis-focused private-equity firm Cresco Capital Partners, agreed.

Linton “was instrumental in developing the innovative, forward-thinking deal he crafted with Acreage, one of Cresco Capital’s early portfolio companies,” Hawkins said. “We applaud Bruce for leading Canopy to become the largest publicly traded cannabis company by market value, and look forward to both his and Canopy’s future and the positive impact the company will continue to have on the sector.”

For more, read:Canopy Growth isn’t buying Acreage Holdings, it’s buying the right to buy Acreage Holdings

The news comes just weeks after Canopy’s fiscal fourth-quarter earnings disappointed investors as the company’s losses mounted and it sold less cannabis sequentially, in the second quarter of recreational cannabis legalization in Canada. Linton says that he’s not sure Constellation’s decision is related to earnings and that they were slightly above its internal models for margins.

For more, read:Canopy co-CEO defends large losses as a deserved reward for pot company’s employees

Constellation Brands, which has made a huge bet on Canopy, was not happy, with Chief Executive William Newlands saying on the company’s earnings call last week that he was not pleased with Canopy’s numbers.

“While we remain happy with our investment in the cannabis space and its long-term potential, we were not pleased with Canopy’s recent reported year-end results,” Newlands said in the call. “However, we continue to aggressively support Canopy on a more focused long-term strategy to win markets and form factors that matter, while paving a clear path to profitability.”

For more on Mark Zekulin: Canopy Growth’s quiet co-CEO on the pot company’s ambitions in the U.S. and more

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Constellation’s share of Canopy’s losses came to $106 million, or $78.2 million including tax benefits.

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Jefferies analyst Ryan Tomkins said those numbers were the likely motive for the push.

“With Constellation employees occupying four of Canopy’s seven board seats, it appears there became a growing frustration with Canopy’s growing investments which saw Constellation’s investment diminishing and losses widening,” Tomkins wrote in a note to clients.

Still, he noted Linton’s achievements at the company he co-founded, which include such milestones as becoming the first to list on the Toronto and New York stock exchanges, the first to reach a $1 billion valuation and to start selling recreational cannabis in Canada, when it fully legalized weed last October.

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“For this, Linton’s work must be applauded,” Tomkins wrote. “The issue now in the space, however, is that for valuations to push on we need to see increasing institutional or FMCG investment. For this, cannabis companies need to show a route to profitability.”

Tomkins rates Canopy stock at hold with a C$77 price target that is 48% above its current trading level.

Cowen analysts led by Vivien Azer said they view they move as a “ constructive change,” that reflects Constellation’s engagement with the company.

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“The magnitude of losses for Canopy has expanded far more than we had expected, and while we commend Linton for his vision in establishing the world’s leading cannabis company, we believe new leadership will be a welcome change,” they wrote in a note to clients. Cowen rates the stock as the equivalent of buy with an C$82 price target.

Constellation made its initial investment last year with the option to take a majority interest in the future. The two companies are working together on developing drinkable cannabis products, which are set to launch in Canada on Dec. 16. To that end, Canopy has told MarketWatch in the past that Constellation is helping it design a bottling factory across the street from its Smiths Falls headquarters and helps with due diligence when asked during acquisitions.

Earlier this month, Canopy won shareholder approval to acquire Acreage Holdings Inc. US:ACRGF, a multistate operator that will give it a foothold in the lucrative U.S. market as soon as federal laws are eased.



Bauer, from the Cannabis Growth mutual fund, said he expects Canopy will search for a big consumer packaged-goods replacement.

“The success of Canopy and all cannabis companies will come down to brands,” he said. “Short-term this may be a negative but we already have seen the largest CBD company in the U.S. (Charlotte’s Web) name Adrienne Elsner as CEO.”

Elsner is the former president of the U.S. snacks division at Kellogg Co. K, +0.23%

Canopy shares fell 4% in early trade Wednesday before recouping those losses. It closed up 2.5%. The stock has gained 53% in 2019, while the ETFMG Alternative Harvest ETF MJ, -0.88% has gained 28%.

Constellation Brands stock gained 0.6% Wednesday and has gained 24% in 2019.

The S&P 500 SPX, +0.52% has gained nearly 20% and the Dow Jones Industrial Average DJIA, +0.27% has advanced 16% this year.

Additional reporting by Greg Robb in Washington, D.C.

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